Accounting choice around a change in fiduciary duty

We examine management's choice of several accounting accruals following an exogenous event that more closely aligned their fiduciary duty to both shareholders and creditors. We build on the work of Becker and Stromberg (2012) who study the change in investment behavior of Delaware incorporated firms following a 1991 legal ruling that set a precedent that firms nearing financial distress (but not in bankruptcy) owe a higher standard of duty to creditors. Becker and Stromberg demonstrate that this leads to a reduction in behaviors that are indicators of classic equity-bondholder conflicts. We ask whether this legal ruling also affects financial reporting behavior. Specifically, as managers view their duties to these different finance providers as more aligned, do they alter their accounting choices as well? Using a differences-indifferences research design, we examine a series of accounting choices and provide evidence that companies affected by the ruling report more conservatively. This result holds after controlling for the fundamental changes in investing decisions documented by Becker and Stromberg (2012). Our results suggest that the incentive to use accounting discretion to exploit bondholders at the expense of shareholders declines when the nature of the governance relationship is exogenously changed to require managers to be more responsible to both parties.