In this paper we examine whether accounting conservatism facilitates or detracts from the efficiency of debt contracting. We consider both “unconditional” and “conditional” conservatism as discussed in the literature. In both cases, our analysis does not support the positive relationship between accounting conservatism and the efficiency of debt contracting, as suggested by Watts [2003], and as hypothesized in numerous empirical studies. In fact, we find the opposite can be true. Under very plausible conditions, we find that accounting conservatism, that affects the information content of accounting reports, actually decreases the efficiency of debt contracts.
Our notion of efficiency is derived endogenously from the joint optimality of the debt covenant and the corresponding interest rate on debt, but differs from the usual efficiency notion assumed in empirical studies. We also develop and use a statistical characterization of conservatism that is new in the literature but which, we believe, is consistent with the widely accepted definition of accounting conservatism originally proposed by Basu [1997].
One surprising result in the literature on entrepreneurship is that median entrepreneurs fare worse than wage-workers. In fact, the median entrepreneur is “poor” relative to his counterparts in the labor force. Hamilton (2000), for example, focuses on entrepreneurs and workers who have between 10 and 35 years of labor market experience. Using the 1984 Survey of and Program Participation he shows that for all those individuals, the predicted median wage worker’s hourly wage is higher than that of the median entrepreneur. Other studies have looked at a subset of entrepreneurs and have reached similar conclusions: the payoff to becoming an entrepreneur is low relative to wage work.
Since the mid 90’s an increasing number of reports and press articles reveal a persistent credit rationing in Argentina. Increasing interest about discrimination against small borrowers in credit markets is motivating politicians and journalists to devote time and pages to this issue.
Academic and non-academic economists, though, do not show the same interest in this issue. Unfortunately, there is not such a thing as a common view about this issue. This paper explores the effects of redlining, preemptive self selection and the role of credit bureaus as informational classifiers of potential borrowers.
