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Asymmetric timely loss recognition, adverse shocks to external capital, and underinvestment: Evidence from the collapse of the junk bond market

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  • Kim, Jaewoo

Abstract

Using the collapse of the junk bond market in the early 1990s as an exogenous shock to external capital, I document, in both difference-in-differences and triple difference designs, that speculative-grade firms that recognize economic losses in a timely manner experience a smaller reduction in investment following the collapse. The effect is more pronounced for speculative-grade firms with a low level of asset liquidation value. Using the excess bond premium as a proxy for fluctuations in the supply of capital, I also extend the generalizability of my findings to a broader sample of 84,421 firm-years over the 1972–2011 period.

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  • Kim, Jaewoo, 2018. "Asymmetric timely loss recognition, adverse shocks to external capital, and underinvestment: Evidence from the collapse of the junk bond market," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 148-168.
    • Handle: RePEc:eee:jaecon:v:65:y:2018:i:1:p:148-168
    DOI: 10.1016/j.jacceco.2017.11.010
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    More about this item

    Keywords

    Accounting conservatism; Asymmetric timely loss recognition; Financial reporting conservatism; Financing frictions; Investment; Supply of capital; Shocks to external capital; Excess bond premium;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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