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Effects of Accounting Conservatism on Corporate Investment Levels, Risk Taking, and Shareholder Value


  • Makoto Nakano

    (Professor, Graduate School of Commerce and Management, Hitotsubashi University (E-mail:

  • Fumitaka Otsubo

    (Institute for Monetary and Economic Studies (currently, Financial Markets Department), Bank of Japan (

  • Yusuke Takasu

    (Graduate School of Commerce and Management, Hitotsubashi University (E-mail:


We investigate the economic consequences of both conditional conservatism and unconditional conservatism from the perspective of stock market investors. Specifically, we empirically analyze how these two types of conservatism affect corporate investment levels, risk taking, and shareholder value (stock return) in Japan. The main results of the study are as follows. First, firms with a high level of conditional conservatism are more likely to curb investments, and the investments they do make tend to have low risk: A self-disciplining effect and an ex post monitoring effect are observed. Second, in contrast, firms with a high level of unconditional conservatism are more likely to make a relatively large amount of investments, and these investments tend to have high risk. These findings indicate that higher levels of unconditional conservatism more strongly limit the earnings downside risk arising from conditional conservatism. Thus, the risk-taking capacity of managers increases to a greater extent, implying that they are more likely to invest in high-risk projects: A risk-taking stimulatory effect is observed. Third, analysis of the effect of conservatism on shareholder value suggests that both conditional conservatism and unconditional conservatism improve the relationship between investment and shareholder value; in other words, investment efficiency might be increased. However, the results of this analysis are not robust enough to allow a definitive conclusion. A limitation of this study is that the observed economic impacts might not be attributable to accounting conservatism alone. Conservatism runs contrary to the neutrality of financial statements, so a critical topic for future research is separate examination of the repercussions of violating neutrality and the ill effects of conservatism.

Suggested Citation

  • Makoto Nakano & Fumitaka Otsubo & Yusuke Takasu, 2014. "Effects of Accounting Conservatism on Corporate Investment Levels, Risk Taking, and Shareholder Value," IMES Discussion Paper Series 14-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:14-e-10

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    conditional conservatism; unconditional conservatism; neutrality; investment level; monitoring; risk taking; shareholder value (stock return);

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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