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The benefits of conservative accounting to shareholders: Evidence from the financial crisis

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Author Info

  • Francis, Bill

    ()
    (Rensselaer Polytechnic Institute)

  • Hasan, Iftekhar

    ()
    (Fordham University and Bank of Finland)

  • Wu, Qiang

    ()
    (Rensselaer Polytechnic Institute)

Abstract

Using the recent financial crisis as a natural quasi-experiment, we test whether and to what extent conservative accounting affects shareholder value. We find that there is significantly positive and economically meaningful relation between conservatism and firm stock performance during the current crisis. The result holds for alternative measures of conservatism and is validated in a series of robustness checks. We further find that the relation between conservatism and firm value is more pronounced for firms with weaker corporate governance or higher information asymmetry. Overall, our paper complements LaFond and Watts (2008) by providing empirical evidence to their argument that conservatism is an efficient governance mechanism to mitigate information risk and control for agency problems, and that shareholders benefit from it.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1308.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2013.

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Length: 44 pages
Date of creation: 20 May 2013
Date of revision:
Handle: RePEc:hhs:bofrdp:2013_008

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: accounting conservatism; shareholder value; financial crisis;

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  1. Wittenberg-Moerman, Regina, 2008. "The role of information asymmetry and financial reporting quality in debt trading: Evidence from the secondary loan market," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 240-260, December.
  2. Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
  3. Francis, Jere R. & Martin, Xiumin, 2010. "Acquisition profitability and timely loss recognition," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 161-178, February.
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