Creditor rights, conflict of interest among creditors, and borrowers’ accounting conservatism : evidence from anti-recharacterization laws

Abstract

Using the staggered adoption of anti-recharacterization laws (ARL) as an exogenous shock to creditor rights, I study the effects of creditor rights on borrowers' accounting conservatism. By denying the recharacterization of securitized assets as collateral for secured debt, ARL protects securitization creditors at the expense of non-securitization creditors such as banks. Given the conflict of interest among these creditors, I argue that non-securitization creditors may demand more conservative accounting in response to the decreasing credit rights. Consistent with my prediction, I find an increase in borrowers' reporting conservatism following the adoption of ARL. To further support my demand-side argument, I provide evidence that the effect of ARL on accounting conservatism is stronger for borrowers with higher credit risks. Moreover, I find a stronger effect for borrowers with better corporate governance, suggesting that these borrowers are more likely to meet the demand by supplying accounting conservatism. Overall, my study establishes a link between creditor rights and borrowers' accounting conservatism and adds to the literature by offering new insights from both perspectives of demand and supply of accounting conservatism.