Accounting conservatism, environmental uncertainty and the capital structure

Abstract

The purpose of this paper is to examine the effect of reporting conservatism on firm’s capital structure decisions and the role of environmental uncertainty as a moderating variable. While the role of conservatism has been investigated in certain debt-contracting setting, evidence is sparse about the effect of conservatism on the degree of financial leverage. We examine this issue using a sample of Australian firms from 1992 to 2005. We find that accounting conservatism positively affect a firm’s leverage structure. Further, we find that the relation between accounting conservatism and firm leverage is moderated by environmental uncertainty context; however this finding is not robust to all three proxies that we used to measure conservatism.