Accounting Conservatism and Firm Investment Efficiency

By Juan Manuel García Lara, Beatriz García Osma, Fernando Penalva. 2016

554 citations recorded by the source corpus.

We argue that conservatism improves investment efficiency. In particular, we predict that it resolves debt-equity conflicts, facilitating a firm׳s access to debt financing and limiting underinvestment. This permits the financing of prudent investments that otherwise might not be pursued. Our empirical results confirm these predictions. We find that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries. We also find that conservatism is associated with reduced overinvestment, even for opaque investments such as research and development.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/9101ab17392a04071ad0d5c7ac82749ee449ad6d

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Citations in the corpus

The effects of financial reporting and disclosure on corporate investment: A review (2019, background): “…in Kravet (2014) raises the question of why shareholders agree with lower risk-taking if that implies forgoing projects with positive NPV. Garcia-Lara et al. (2016) propose an explanation: since timely loss recognition Electronic copy available at: https://ssrn.com/abstract=3429337 35 mitigates…”
IFRS – 10 years later (2016, background): “This suggests that the expected net effect of IFRS adoption on capital costs might not be large, and would be reflected in the quantity rather than the price of new investment (see Garcı́a Lara et al. 2016).”
The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis: THE EFFECT OF ACCOUNTING CONSERVATISM (2016, unknown): “18 See Qiang (2007) and Garcia Lara et al. (2009b) for detailed discussions on the economic determinants of conditional and unconditional conservatism.”
Conditional conservatism and the limits to earnings management (2020, unknown): “To conduct our tests, we construct and validate a firm-specific measure of conditional conservatism based on the proxies developed by Givoly and Hayn (2000), Khan and Watts (2009) and Callen et al.”
Financial reporting quality, debt maturity and investment efficiency (2014, background): “Consistent with this, García-Lara et al. (2010) find that conservatism reduces both overinvestment and underinvestment, because it reduces investment-cash flow sensitivity in overinvestment firms”