Accounting and Contracting Choices around a Change in Fiduciary Duties

We exploit an influential 1991 Delaware court ruling to examine the impact of changes in managerial fiduciary duties on firms’ accounting and contracting choices. The ruling shifted the balance of power in favor of creditors and away from shareholders for a specific group of firms. We find that, following the ruling, affected firms exhibit lower abnormal accruals, greater magnitude and incidence of negative special items, and are more likely to adopt SFAS 106 using the immediate recognition method for OPEB liabilities. We also find that debt contracts of affected firms rely less on the use of income escalators following the ruling. Our results hold across a battery of robustness tests. Overall, our study demonstrates how a shift in fiduciaries duties owed by management that enhances the relative power of creditors changes the nature of both financial reporting and debt contracting.