Abstract

http://ssrn.com/abstract=1542117
 
 

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Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions


Todd D. Kravet


University of Connecticut - Department of Accounting

April 14, 2014

Journal of Accounting & Economics (JAE), Vol. 57, No. 2-3, 218-240

Abstract:     
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, M41

Accepted Paper Series





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Date posted: January 26, 2010 ; Last revised: August 27, 2014

Suggested Citation

Kravet, Todd D., Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions (April 14, 2014). Journal of Accounting & Economics (JAE), Vol. 57, No. 2-3, 218-240. Available at SSRN: http://ssrn.com/abstract=1542117 or http://dx.doi.org/10.2139/ssrn.1542117

Contact Information

Todd D. Kravet (Contact Author)
University of Connecticut - Department of Accounting ( email )
School of Business
Storrs, CT 06269-2041
United States
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