Accounting conservatism and firm investment efficiency

• Autores: Juan Manuel García Lara, Beatriz García Osma, Fernando Peñalva
• Localización: Documents de Treball ( Universitat Autònoma de Barcelona. Departament d'Economia de l'Empresa ), ISSN-e 1988-7736, Nº. 4, 2010
• Idioma: inglés
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• Resumen

  • Conservatism, through the timelier recognition of losses in the income statement, is expected to increase firm investment efficiency through three main channels: (1) by decreasing the adverse effect of information asymmetries between outside equity holders and managers, facilitating the monitoring of managerial investment decisions; (2) by increasing managerial incentives to abandon poorly performing projects earlier and to undertake fewer negative net present-value investments; and (3) by facilitating the access to external financing at lower cost. Using a large US sample for the period 1990-2007 we find a negative association between conservatism and measures of over- and under- investment, and a positive association between conservatism and future profitability. This is consistent with firms reporting more conservative numbers investing more efficiently and in more profitable projects. Our results add to a growing stream of literature suggesting that eliminating conservatism from accounting regulatory frameworks may lead to undesirable economic consequences.