We test for changes in investment efficiency around a shock to financial reporting quality—the adoption of SFAS No. 123R, which requires that employee stock option (ESO) costs be recognized rather than disclosed at fair value. We predict and find a reduction in underinvestment for firms...

This study examines the relation between performance covenants in private debt contracting and conservative accounting under adverse selection. We find that under severe adverse selection (i.e., high information asymmetry), accounting conservatism and performance covenants act as complements to...

This study examines the private debt contracting relation between performance covenants and conservative accounting under asymmetric information. Asymmetric information is characterized by borrowers' proclivity to appropriate wealth from lenders to themselves. We find that accounting...