The Empirical Study Of Relationship Between Accounting Conservatism And Bank Debt Covenants

After the financial crisis, awareness of the bank’s risk management has been significantly strengthened, China’s commercial banks non-performing loan ratio from 6.7% of 2007 dropped to 1.6% of 2014. Accounting information is the most important basis for banks to make lending decisions, banks strengtheningtheir risk management awareness make them more cautious to assessment of accounting information. Accounting conservatism plays an important role as one of the quality characteristics of financial accounting information. This paper from the three perspective of borrowing availability, debt maturity, debt costs explores the relationship between accounting conservatism and debt covenants.This paper firstly introduces the research background and significance of the article, and reviews recent research. Then relying on asymmetric information theory, contract theory, principal-agent theory, signal theory, creditor protection theory, and considering the nature of the companies’ property rights, this paper used the Shanghai and Shenzhen a-share listed companies’ data from 2009 to 2013 to study the relationship between accounting conservatism and debt covenants. This paper use negative non-operating accruals to measure the level of accounting conservatism, Empirically test the effect of accounting conservatism on the proportion of enterprises obtain bank loans、The proportion of long-term borrowings for the proportion of enterprises to obtain and cost of debt. This article also combine with our unique institutional environment, empirically test accounting conservatism influence on debt covenants in companies of different properties.The results show that accounting conservatism is positive correlation with the loans the company get, positively correlate with the proportion of long-term loans. It also find that the proportion of new bank loans in the non-state-controlled listed companies is greater sensitive on accounting conservatism than the proportion of new bank loansin state-controlled listed companies. therefore, due to the presence of government intervention, debt soft constraints, implicit government guarantees and other issues, the state-owned holding weaken the effect of accounting conservatism on bank lending decisions. Finally, the paper have given the conclusions of this study, and made policy recommendations.