This paper presents a model showing that accounting conservatism affects creditor coordination when the borrowing firm is in financial distress. There are two effects. First, accounting conservatism tends to reduce dividend payments and to keep assets within the firm (dividend restriction effect). Second, it biases expectations of financial distress (information bias effect). In financial distress, the dividend restriction effect may induce a costly prisoner’s dilemma situation in which some creditors are tempted to call a loan before other creditors do so. This dilemma occurs when there are sufficient assets, i.e. when accounting conservatism is sufficiently strong. The information bias effect makes the prisoner’s dilemma less likely to occur, since creditors cannot be sure that a “bad” financial report implies financial distress. The latter result suggests that conservative accounting might be desirable in the banking industry where inefficient creditor coordination (bank run) is more likely and its costs are quite substantial. Accounting conservatism may also be beneficial in the sense that the threat of a prisoner’s dilemma provides stronger incentives to the debtor to avoid financial distress. The model explains why we observe more accounting conservatism with private debt than with public debt and why informed creditors receive more collateral.