Accounting Conservatism and Underpricing of Newly Issued Corporate Bond

Building upon recent research suggesting that debt markets rather than equity markets shape financial reporting, this study examines the relationship between conservative reporting and the underpricing of newly issued corporate bonds. Consistent with signaling argument of underpricing, empirical evidence suggests that bond issuers with more conditional conservative reporting will experience more underpricing for newly issued corporate bonds. In addition, issuers with more unconditional conservative reporting will experience more underpricing, which also supports signaling argument. This study contributes to the conservatism literature by providing arguments and empirical evidence that is inconsistent with the traditional debt contracting efficiency view of unconditional conservatism. In addition, it extends the underpricing literature by introducing accounting conservatism as a proxy for financial reporting quality to explain the underpricing of newly issued corporate bonds. The findings that both conditional and unconditional conservative reporting increases the underpricing of newly issued corporate bonds supports fair value accounting argument, which has practical implications.