Accounting Conservatism and Debt Contracts : Efficient Liquidation and Covenant Renegotiation ∗

@inproceedings{Li2010AccountingCA,
  title={Accounting Conservatism and Debt Contracts : Efficient Liquidation and Covenant Renegotiation ∗},
  author={Juan Li},
  year={2010}
}
This paper develops a theoretical model to understand the role of accounting conservatism in debt contracts. The optimal debt contract includes an accounting based covenant that gives the creditor the right to liquidate when accounting information reveals unfavorable news about the firm. I find that the demand for accounting conservatism depends on whether renegotiation occurs and if so, at what cost. When the covenant is not renegotiable or when renegotiation cost is sufficiently high, more… CONTINUE READING
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