In this study, I examine whether the use of conservative accounting reporting mitigates the adverse consequences of covenant violations, such as restrictions on borrowing firms’ financing and investing activities. I also examine the implications of accounting conservatism, which can trigger quicker covenant violations (Zhang, 2008) and allow transfer of decision rights to lenders, for violating firms’ operating performance in the post-violation period. Accounting information has been extensively used in debt contracts (Leftwich, 1983; Dichev and Skinner, 2002) and the characteristics of accounting information have important implications for debt contracting. Particularly, Watts (2003a, b) argues that one of the accounting characteristics, conservatism, can enhance contracting efficiency because reporting conservatism can ensure lenders the minimum level of asset values at liquidations and thereby reduces lenders’ downside risk.