Informational and Cushioning Properties of Conservative Balance Sheets: A Study of Crises Resilience
Published in Review of Quantitative Finance and Accounting, 2025
This study examines the informational and cushioning properties of balance sheet conservatism (BSC) and their role in mitigating the adverse effects of financial crises. I document that, due to informational property, high-BSC firms raise more debt and have a lower cost of debt financing during the crisis. The cushioning property of BSC is associated with lower earnings volatility, likelihood of significant asset write-downs and probability of covenant violations. These properties contribute to superior performance, including smaller declines in stock prices, investment, employment, and productivity. An out-of-sample test using the setting of the Great Depression (1929-1933) confirms the aforementioned findings. Overall, a path analysis suggests that BSC effects operate mostly through cushioning (informational) property contributing 39% (11%) to overall firms’ performance during the crisis.
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