Abstract

This thesis consists of three essays on issues related to conditional accounting conservatism. In the first essay, we explore how options trading influences the demand for conditional accounting conservatism. Using a large sample of US firms for the period 1997-2019, we provide evidence that options trading is negatively related to the degree of conditional conservatism. Furthermore, a difference in differences analysis provides evidence that firms reduce their level of conditional conservatism after being listed on the options market. We perform further analyses to highlight specific scenarios where an active options market leads to a lower level of conditional accounting conservatism. Overall, our findings suggest that as options trading enhances information environments and alleviates information asymmetries, it reduces the demand for conditional conservatism from users of financial statements.
The second essay explores how a peer’s bankruptcy affects financial reporting by other firms within the industry. A peer firm bankruptcy announcement raises investors’ perception of the risk of same industry firms, resulting in higher external financing costs. We argue that following a peer firm bankruptcy filing, a firm in the same industry, may exhibit a higher degree of conditional conservatism to provide more verifiable information and reassure outsiders about its operation. We find that firms use more conditional conservatism following a peer firm bankruptcy filing. Our findings survive a battery of robustness tests. To further explore how bankruptcy spillover effects of peer firms lead to more conservative reporting, we also conduct a series of cross-sectional tests.
The third essay provides a review of research on the economic consequences of conditional accounting conservatism. This survey shows that it is well documented that conditional conservatism contributes to debt contracting efficiency. The preponderance of the evidence suggests that conditional conservatism leads to positive economic consequences. However, I find some disparities in the findings of prior research. I highlight the potential sources of these disparities. Finally, I present promising future research avenues to address the disparities in the prior studies.