Use this identifier to quote or link this document: http://hdl.handle.net/2072/97453

Accounting conservatism and firm investment efficiency
García Lara, Juan Manuel; García Osma, Beatriz; Penalva, Fernando
Conservatism, through the timelier recognition of losses 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 accounting regulatory frameworks may lead to undesirable economic consequences.
2010-01
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Working Paper
1988-7736
Universitat Autònoma de Barcelona. Departament d'Economia de l'Empresa
Document de treball (Universitat Autònoma de Barcelona. Departament d'Economia de l'Empresa);10/4
         

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