Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions
Todd D. Kravet
University of Texas at Dallas - Naveen Jindal School of Management
April 14, 2014
Journal of Accounting & Economics (JAE), Vol. 57, No. 2-3, Forthcoming
Watts (2003) and Ball and Shivakumar (2005) argue that accounting conservatism decreases managerial incentives to make negative net present value investments. I develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments. I find that under more conservative accounting managers make less risky acquisitions and that firms with accounting-based debt covenants drive this association. This result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants. Conservatism reducing risk-shifting can in part explain debt holders’ demand for conservative accounting.
Keywords: mergers and acquisitions, accounting conservatism, risk-taking, debt covenants
JEL Classification: G34, M40, M41Accepted Paper Series
Date posted: January 26, 2010 ; Last revised: May 20, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.359 seconds