This paper investigates whether the initiation of trading in credit default swaps (CDSs) on a borrowing firm׳s outstanding debt is associated with a decline in that firm׳s reporting conservatism. CDS investments can modify lenders׳ payoffs on their loan portfolios by providing insurance on negative credit outcomes. The onset of CDS trading reduces lenders׳ incentives to continuously monitor borrowers and also their demand that borrowers report conservatively. Additionally, borrowers expect CDS-insured lenders to be more intransigent in renegotiations triggered by defaults and covenant violations. Since conservatism can trigger earlier covenant violations, borrowers have heightened incentives to report less conservatively in the post-CDS period. Using a differences-in-differences research design, we observe a decline in borrowing firms׳ reporting conservatism after CDS trade initiation. This effect is more pronounced when reputation costs lenders face from reducing monitoring are lower, when debt contracts outstanding at the time of CDS trade initiation have more financial covenants, and when lenders who monitor borrowers more regularly in the pre-CDS period enter into CDS contracts to hedge their credit exposures.

We examine the relation between accounting conservatism and creditor recovery rates for firms in default. We also test the link between conservatism and the length of bankruptcy resolutions. We find that creditors of firms with more conservative accounting before default have significantly higher recovery rates, and that this positive relation is more pronounced for default firms that violated covenants before the default. We also find that conservative firms have higher asset productivity, shorter bankruptcy resolution, and a significantly higher probability of emerging from bankruptcy. These results suggest that accounting conservatism preserves firm value, leading to higher creditor recovery upon borrower default.

We investigate whether multiemployer defined-benefit pension plan (MEPP) underfunding is priced by shareholders and creditors. Prior to the FASB's new MEPP standard (effective December 2011), when the disclosures on such plans were sparse, we find evidence (some evidence) that our estimate of a firm's share of MEPP underfunding is credit (value) relevant. We also find some evidence that a proxy for the funded status of a firm's MEPPs is incrementally value relevant over and above the firm's cash contributions, but no evidence that it is credit relevant. Furthermore, an estimate of MEPP underfunding that incorporates the additional disclosures required under the new MEPP standard is value and credit relevant, both individually and incrementally, over and above our old estimate. Overall, our findings suggest that shareholders and creditors view MEPP underfunding as a debt-like obligation and that the additional MEPP disclosures under the new standard are useful to market participants.