IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp2013_008.html
   My bibliography  Save this paper

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

Author

Listed:
  • Francis, Bill
  • Hasan, Iftekhar
  • Wu, Qiang

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.

Suggested Citation

  • Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2013. "The benefits of conservative accounting to shareholders: Evidence from the financial crisis," Bank of Finland Research Discussion Papers 8/2013, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2013_008
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/212248/1/bof-rdp2013-008.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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. 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.
    3. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, vol. 99(2), pages 606-610, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ying Chen & Don Capener & Eric Valenzuela, 2023. "Valuation effects of earnings management on hotel firm value," American Journal of Economics and Sociology, Wiley Blackwell, vol. 82(3), pages 167-185, May.
    2. Harakeh, Mostafa & Leventis, Stergios & El Masri, Tarek & Tsileponis, Nikolaos, 2023. "The moderating role of board gender diversity on the relationship between firm opacity and stock returns," The British Accounting Review, Elsevier, vol. 55(4).
    3. Kannan, Yezen & Khallaf, Ashraf & Gleason, Kimberly & Bostan, Ibrahim, 2023. "The relationship between R&D intensity, conservatism, and management earnings forecast issuance," Advances in accounting, Elsevier, vol. 62(C).
    4. Dan Zhang & Shiguang Ma & Xiaofei Pan, 2023. "How do institutional investors influence accounting conservatism in China?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S2), pages 2719-2754, June.
    5. Wessel M Badenhorst & Rieka von Well, 2023. "The Value‐relevance of Fair Value Measurement for Inventories," Australian Accounting Review, CPA Australia, vol. 33(2), pages 135-159, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. repec:zbw:bofrdp:2013_008 is not listed on IDEAS
    3. Paul Brockman & Tao Ma & Jianfang Ye, 2015. "CEO Compensation Risk and Timely Loss Recognition," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 204-236, January.
    4. Ruch, George W. & Taylor, Gary, 2015. "Accounting conservatism: A review of the literature," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 17-38.
    5. Karthik Balakrishnan & John E. Core & Rodrigo S. Verdi, 2014. "The Relation Between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 1-36, March.
    6. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    7. Araceli Mora & Martin Walker, 2015. "The implications of research on accounting conservatism for accounting standard setting," Accounting and Business Research, Taylor & Francis Journals, vol. 45(5), pages 620-650, August.
    8. Juan Manuel García Lara & Beatriz García Osma & Fernando Penalva, 2014. "Information Consequences of Accounting Conservatism," European Accounting Review, Taylor & Francis Journals, vol. 23(2), pages 173-198, June.
    9. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2016. "Accounting conservatism and firm investment efficiency," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 221-238.
    10. Ishida, Souhei & Ito, Kunio, 2013. "The Effect of Accounting Conservatism on Corporate Investment Behavior," Working Paper Series 175, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    11. Inder K. Khurana & Changjiang Wang, 2015. "Debt Maturity Structure and Accounting Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 167-203, January.
    12. Alastair Lawrence & Richard Sloan & Estelle Sun, 2018. "Why Are Losses Less Persistent Than Profits? Curtailments vs. Conservatism," Management Science, INFORMS, vol. 64(2), pages 673-694, February.
    13. Banker, Rajiv D. & Basu, Sudipta & Byzalov, Dmitri & Chen, Janice Y.S., 2016. "The confounding effect of cost stickiness on conservatism estimates," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 203-220.
    14. Chen-Yin Kuo, 2018. "Does Accounting Conservatism Reduce Default Risk? Evidence from Taiwan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 227-242.
    15. Kim, Jaewoo, 2018. "Asymmetric timely loss recognition, adverse shocks to external capital, and underinvestment: Evidence from the collapse of the junk bond market," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 148-168.
    16. Bo-Hung Chiou & Shen-Ho Chang, 2020. "Influence of Investment Efficiency by Managers and Accounting Conservatism on Idiosyncratic Risks to Investors," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(1), pages 1-8.
    17. Kirchler, Michael & Lindner, Florian & Weitzel, Utz, 2020. "Delegated investment decisions and rankings," Journal of Banking & Finance, Elsevier, vol. 120(C).
    18. Simon Cornée, 2014. "Soft Information and Default Prediction in Cooperative and Social Banks," Journal of Entrepreneurial and Organizational Diversity, European Research Institute on Cooperative and Social Enterprises, vol. 3(1), pages 89-103, June.
    19. Vittoria Cerasi & Tommaso Oliviero, 2014. "Managerial compensation, regulation and risk in banks: theory and evidence from the financial crisis," Working Papers 279, University of Milano-Bicocca, Department of Economics, revised Jul 2014.
    20. Deniz Igan & Prachi Mishra & Thierry Tressel, 2012. "A Fistful of Dollars: Lobbying and the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 195-230.
    21. Suzanne Salloy & Irfan Akbar Kazi, 2013. "Contagion effect due to Lehman Brothers’ bankruptcy and the global financial crisis: From the perspective of the Credit Default Swaps’ G14 dealers," Erudite Working Paper 2013-02, Erudite.

    More about this item

    Keywords

    Accounting conservatism; Shareholder value; Financial crisis;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp2013_008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.