Note(s): Panel A presents the probit analysis with industry and year fixed effects. Dependent variable: bankruptcy (a dummy variable that equals one if the firm is financially distressed and bankrupt, and zero otherwise). Independent variables: ROA is net income divided by total assets; ETL is EBITDA divided by total liabilities. EBITDA is earnings before interest, taxes, depreciation and amortization; LTA is total liabilities divided by total assets; LSIGMA is the standard deviation of the residual return from a regression of twelve-monthly returns of the firm on monthly returns of the market index

Panels B and C present OLS regressions corrected for self-selection bias and adjusted for firm clustering. Dependent variable: C-score is the firm-year measure of conservatism as in Khan and Watts (2009). Independent variables: Lev is a dummy variable that takes one if leverage is above the median, and zero otherwise; leverage is defined as total debt (Compustat #9 + Compustat #34) scaled by total assets (Compustat #6); LitiCost-Aud is a binary variable that equals one if the code of a firm’s auditor (Compustat #149) is from one to eight, and zero otherwise; Tax is a dummy variable that takes one if TaxCost is above the median, and zero otherwise. TaxCost is the association between book income and tax income estimated from time-series regression TX_jt = β_0j + β_jt BKTX _jt + ε_jt for firm j over the sample period, where BKTX_jt is tax expense for firm j in year t (Compustat #16) and TX _jt is tax expense minus deferred tax expense (Compustat #16 – Compustat #50). All variables are deflated by lagged total assets (Compustat #6). Reg is the firm’s regulation cost. It is a dummy variable that equals 1 if sales deflated by industry total sales/the number of firms in the industry is of top quartile, and 0 otherwise; sales is Compustat #12. Selectivity variable (Mills ratio as defined in Shehata (1991) and Lourenço et al. (2013)). ***p < 0.01, **p < 0.05, *p < 0.1