The Effect of Accounting Conservatism on Corporate Investment Behavior
AbstractWe examine how two types of conservatism—conditional conservatism and unconditional conservatism—affect corporate investment behavior. Conditional conservatism forces managers to recognize the loss resulting from an investment project on a timely basis. When risk-averse managers are aware that their reputation and compensation are affected adversely by recognizing the loss resulting from project failure, they are less likely to undertake the project ex ante despite its positive net present value (NPV). Thus, conditional conservatism probably inhibits corporate investment behavior. In contrast, unconditional conservatism mitigates a firm’s earning volatility, especially downward volatility, by providing an accounting slack. Thus, it is likely that unconditional conservatism promotes corporate investment behavior. Using a large sample of Japanese companies, we empirically analyze how conditional conservatism and unconditional conservatism affect corporate investment behavior. These results suggest that although firms with higher conditional conservatism take more negative investment initiatives, those firms with higher unconditional conservatism take more positive investment initiatives.
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Bibliographic InfoPaper provided by Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University in its series Working Paper Series with number 175.
Length: 33 p.
Date of creation: Sep 2013
Date of revision:
Conservatism; Conditional Conservatism; Unconditional Conservatism; Corporate Behavior; Capital Investment;
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-09-28 (Accounting & Auditing)
- NEP-ALL-2013-09-28 (All new papers)
- NEP-CSE-2013-09-28 (Economics of Strategic Management)
- NEP-HME-2013-09-28 (Heterodox Microeconomics)
- NEP-PPM-2013-09-28 (Project, Program & Portfolio Management)
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