The Role of Conservatism in the Timing of Asset Impairments and Liquidity of Corporate Bonds: Evidence from the Financial Crisis

• In Event: Accounting Conservatism: Outcomes and Identification

Abstract

We examine the consequences of conservative reporting over time. We find that firms using more conservative reporting during the period leading up to the recent financial crisis are timelier in recording asset impairments during the crisis. Moreover, the positive relation between pre-crisis conservative reporting and timely crisis-period impairments is attenuated for firms with weaker corporate governance. Lastly, we find that firms’ public bonds experience smaller increases in illiquidity during the financial crisis if they reported conservatively before the crisis and recorded timelier asset impairments during the crisis, but not if they only did one or the other. Collectively, our results suggest that conservative reporting reduced managerial opportunism in the timing of asset impairments and increased the efficiency of secondary trading of corporate bonds during the financial crisis.

Authors

• Joshua Gunn, University of Missouri–Columbia

• Inder Khurana, University of Missouri–Columbia

• Sarah E Stein, Virginia Tech