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Accounting Conservatism and Firm Investment Efficiency

Author

Listed:
  • Beatriz García
  • Juan M. Garcia Lara

    (Department of Business Administration Universidad Carlos III de Madrid)

  • Fenando Penalva

    (IESE Business School, University of Navarra.)

Abstract

Conservatism, through the timelier recognition of l osses 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 accou nting regulatory frameworks may lead to undesirable economic consequences.

Suggested Citation

  • Beatriz García & Juan M. Garcia Lara & Fenando Penalva, 2010. "Accounting Conservatism and Firm Investment Efficiency," Working Papers 1004, Departament Empresa, Universitat Autònoma de Barcelona, revised Jan 2010.
    • Handle: RePEc:bbe:wpaper:1004
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    References listed on IDEAS

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    Cited by:

    1. Juan Pedro Sánchez Ballesta & M. Fuensanta Cutillas Gomariz, 2012. "Financial reporting quality, debt maturity and investment efficiency," Working Papers. Serie EC 2012-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Cutillas Gomariz, Mª Fuensanta & Sánchez Ballesta, Juan Pedro, 2014. "Financial reporting quality, debt maturity and investment efficiency," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 494-506.
    3. Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2013. "The benefits of conservative accounting to shareholders : Evidence from the financial crisis," Research Discussion Papers 8/2013, Bank of Finland.
    4. repec:zbw:bofrdp:2013_008 is not listed on IDEAS
    5. Kerstin Lopatta & Katarina Böttcher & Sumit K. Lodhia & Sebastian A. Tideman, 2020. "Parity codetermination at the board level and labor investment efficiency: evidence on German listed firms," Journal of Business Economics, Springer, vol. 90(1), pages 57-108, February.

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    More about this item

    Keywords

    Conservatism; earnings asymmetric timeliness; inves tment efficiency; overinvestment; underinvestment.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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