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When companies approach banks to borrow money, banks are likely to investigate if these companies have enough net assets to cover their loans. Banks are not interested in the future values of the assets but the present values, because future values are not verifiable or credible.

Gigler (2009) suggest that 'conservatism results in timely loss recognition at the expense of timely gain recognition. Given the asymmetric payoff to debt holders, timely loss recognition is of much greater importance to them than timely gain recognition. Timely loss recognition results in earlier violation of debt contracts. Debt holders can exercise their contractual rights more quickly and can restrict the actions of managers.'' [4]

So accounting conservatism helps the bank to gain reliable information of the present value of the net assets of these companies. So we can make the assumption that accounting conservatism can enhances the efficiency of debt contracts.

Conservative accounting as information for equity investors

Conservative performance measures or numbers can be quite useful for equity investors. When faced with liquidation the conservative value of the net assets can be of great importance for the investors.. An important element of equity valuation is the abandonment option. When the

operating value of the firm falls below the liquidation value of net assets there is an opportunity for increasing the value of the firm by liquidating the assets and go out of business. This is just the practice that corporate raiders do. They buy companies when their operating value is below their net asset value and sell the net assets to make an arbitrage profit and therefore have been accused of taking over firms to do just that.

Watts (2002, p 13) stated that ''Even if the abandonment option is not in the money, the orderly liquidation value of net assets is relevant. In that situation there is frequently still a probability the option will be in the money in the future. In that case the option value affects the current valuation of equity.'' [5]

An income tax explanation for accounting conservatism

Income taxes have long been tied to reported earnings and as a result have influenced the calculation of earnings. Profitable companies have a tendency to use accounting methods to reduce reported earnings. So most of these companies use the accounting conservatism method that will likely reduce their profit. These lower reported profit leads to a decrease in tax payments.

Accounting conservatism and managers.

If somehow accounting conservatism can lead to an increase in profits and managers bonuses are linked to the profits. The managers are more likely to use this method.

This behavior can create a principal-agent problem.

委托代理理论——The principal-agent theory

This part will explain how conservatism is measured . We will use this part so we can make a critical review of the literature.

Measuring Conservatism [6]

So Watts defines three types of measures for accounting conservatism:

Earnings/stock returns relation measures;

净资产度量——Net asset measures

Earnings/accrual measures.

Watts' research on measuring accou本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。