Affiliated bankers on board and conservative accounting

We examine the tradeoff between having affiliated bankers on board and conservative accounting for mitigating debtholder-shareholder conflicts. We argue that affiliated bankers on board provide lenders with private information and control rights, thereby lowering debtcontracting demand for conservatism in public financial reports. We find that firms with affiliated bankers on board have lower conservatism in terms of asymmetric timeliness of earnings (Basu, 1997). We also show that the positive relation between conservatism and leverage/covenant intensity (LaFond and Watts, 2008; Nikolaev, 2010) does not exist for firms with affiliated bankers on board, suggesting that the presence of affiliated bankers on board lowers debt contracting demand for conservatism. Our evidence suggests that having affiliated bankers on board is an alternative, albeit costly, mechanism to conservatism/debt-contracting for mitigating debtholder-shareholder conflicts and provides indirect but powerful evidence in support of the debt-contracting motivation for conservative accounting. JEL classification: G3; G21; M41