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