Publication Type

Journal Article

Version

acceptedVersion

Publication Date

12-2020

Abstract

We exploit an influential 1991 Delaware court ruling to examine the impact of changes in managerial fiduciary duties on firms’ accounting and contracting choices. The ruling expanded directors’ fiduciary duties in favor of creditors and away from shareholders for a specific group of firms. Using a hand-collected sample of debt contracts around the ruling date, we find that, following the ruling, debt contracts of affected firms rely less on the use of income escalators (provisions in loan contracts which require changes in net worth to reflect losses in full, but only partially for gains and profits) and other conservative adjustments such as requiring net worth calculations to include extraordinary losses but not gains. In addition, affected firms exhibit lower abnormal accruals, more negative special items, and are more likely to adopt SFAS 106 using the immediate recognition method for OPEB liabilities. Our results hold across a battery of robustness tests. Overall, our study demonstrates how a shift in fiduciaries duties owed by management that enhances the relative power of creditors changes the nature of both financial reporting and debt contracting.

Keywords

Contracting Conservatism, Reporting Conservatism, Debt Contracting, Fiduciary Duties, Corporate Governance

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Contemporary Accounting Research

Volume

37

Issue

4

First Page

2472

Last Page

2500

ISSN

0823-9150

Identifier

10.1111/1911-3846.12607

Publisher

Wiley

Embargo Period

5-9-2021

Copyright Owner and License

Authors

Comments

Working paper available at https://ink.library.smu.edu.sg/soa_research/1298/

Additional URL

https://doi.org/10.1111/1911-3846.12607

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