Armon Vakili
BUS A455 – Applied-Professional and Empirical Research in Accounting and Auditing
February 27, 2013
Accounting Research Workshop Paper

“Asymmetric Timely Loss Recognition, Private Debt Markets, and Underinvestment: Evidence from the Collapse of the Junk Bond Market”

Jaewoo Kim, University of Iowa

Jaewoo Kim’s research dissertation is encompassed entirely by the concept of “accounting conservatism”. The report stems from prior research and empirical evidence that concludes accounting conservatism has an inverse relationship with a firm’s tendency to overinvest. It’s also conceptualized based on previous reports that examine the role accounting conservatism plays with the inclusion of specific characteristics of debt contracts (such as covenants, provisions, etc.). This reports seeks to move away from the relationship conservatism has with overinvestment and beyond the relationship it has with pre-existing debt contracts. More specifically, this report’s primary research questions asks “Does accounting conservatism have an effect on a firm’s ability to acquire debt from private markets when other access to debt is constrained?” Kim seeks to examine whether a firm’s accounting conservatism can be used as a tool to access new avenues of capital debt when that firm’s previous debt financing has been constrained.
This is an interesting study because it can produce important information that might be crucial for firms that are troubled with constrained access to certain capital markets. When shocking systematic or idiosyncratic news events occur, certain capital markets can be constrained or temporarily eliminated for a period of time. Kim uses the junk bond collapse during 1990-1991 as a natural, historical example of such a situation in this report. When this occurs, firms whose primary capital financing was through that collapsed market will