Conditional Conservatism, Debt Markets and Financial Structure: Further Evidence from the United Kingdom

Abstract

Conditional conservatism has caused a controversy in recent literature in regards to whether it is rather driven by reporting demands originating from debt or equity markets. Extending the work of Ball/Shivakumar (2005), who found public companies to report conditionally more conservative than private ones, our paper additionally differentiates between three subsamples of public firms (equity and/or bonds listed) and, moreover, also between different financial structures. Comparing the magnitude of conditional conservatism across the different subsamples indicates that the demands for conditional conservatism seem to be similar in all public markets implying that a demand for conditional conservatism emanates to the same extent in bond markets even when no equity is listed. Moreover, we show that the extent of conditional conservatism increases (decreases) when firms with only listed equity display comparatively higher (lower) debt (equity) ratios. We interpret these findings as strong demands for conservatism originating from public and private debt markets, but, to some degree, also from equity markets. Surprisingly, we also find that private firms with higher (lower) equity (debt) ratios report more conservative than those with lower equity ratios pointing to structurally different reporting demands emanating from public and private markets. Our findings contribute to the discussion which reporting demands drive conservatism.