evidence that greater (lesser) asymmetric timely loss recognition leads to increases (decreases) in debt characteristics. None of the coefficients on future change in interaction terms CHAR (DRit*RETit*ΔCHARit+1) are significant, inconsistent with the level of asymmetric timely loss recognition in the contemporaneous period resulting in changes in debt characteristics in the future. In summary, the results in Table 7 are consistent with debt characteristics leading to variation in conditional conservatism. 5.4. Other explanations of conditional conservatism Beaver (1993) and Watts (2003a) suggest that litigation may be a source of conservatism since there is a higher probability of litigation when the financial statements are overstated, rather than understated. As a robustness check, we include a proxy for litigation risk in the main regression to examine whether the results are robust to controlling for litigation-based effects. The proxy for litigation risk takes the value of 1 if firms operate in the four-digit SIC code of 2833-2836 (pharmaceutical), 3570-3577 (computer hardware), 3600-3674 (electronics), (retailing), and 7370-7374 (computer software), and zero otherwise. Our conclusions remain the same after controlling for litigation risk (untabulated). 6. Conclusions We examine whether asymmetric timely loss recognition varies in predictable ways based on the characteristics of debt structure, such as the maturity, convertibility, securitization, seniority and placement of debt. Based on Watts (2003a) contracting explanation for accounting conservatism, we hypothesize that debt contract characteristics associated with more asymmetric payoffs and greater information asymmetry between manager and debtholders, as well as weaker debtholder control rights, should be associated with an upwards shift in the demand for
evidence that greater (lesser) asymmetric timely loss recognition leads to increases (decreases) in debt characteristics. None of the coefficients on future change in CHAR interaction terms (DRit*RETit*ΔCHARit+1) are significant, inconsistent with the level of asymmetric timely loss recognition in the contemporaneous period resulting in changes in debt characteristics in the future. In summary, the results in Table 7 are consistent with debt characteristics leading to variation in conditional conservatism. 5.4. Other explanations of conditional conservatism Beaver (1993) and Watts (2003a) suggest that litigation may be a source of conservatism since there is a higher probability of litigation when the financial statements are overstated, rather than understated. As a robustness check, we include a proxy for litigation risk in the main regression to examine whether the results are robust to controlling for litigation-based effects. The proxy for litigation risk takes the value of 1 if firms operate in the four-digit SIC code of 2833-2836 (pharmaceutical), 3570-3577 (computer hardware), 3600-3674 (electronics), (retailing), and 7370-7374 (computer software), and zero otherwise. Our conclusions remain the same after controlling for litigation risk (untabulated). 6. Conclusions We examine whether asymmetric timely loss recognition varies in predictable ways based on the characteristics of debt structure, such as the maturity, convertibility, securitization, seniority and placement of debt. Based on Watts (2003a) contracting explanation for accounting conservatism, we hypothesize that debt contract characteristics associated with more asymmetric payoffs and greater information asymmetry between manager and debtholders, as well as weaker debtholder control rights, should be associated with an upwards shift in the demand for