Accounting Conservatism and Firm Investment: Evidence from the Global Financial Crisis
University of Pennsylvania - Accounting Department; University of Pennsylvania - The Wharton School
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management
November 22, 2013
MIT Sloan Research Paper No. 4941-11
This paper examines the effect of accounting conservatism on firm-level investment during the 2007-2008 global financial crisis. Using a differences-in-differences identification strategy, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis than firms with more conservative financial reporting, controlling for firm fixed effects and time-varying measures of investment opportunities. This relation is stronger for firms that are financially constrained, face greater external financing needs, or have higher information asymmetry. We do not obtain similar results for some placebo crisis, or following the negative demand shock to the economy caused by the events of September 11, 2001. In addition, we find that more conservative firms experienced lower declines in both debt raising activity and stock performance. In sum, these findings are consistent with our predictions that conservatism improves borrowing capacity and mitigates underinvestment.
Number of Pages in PDF File: 49
Keywords: Conservatism; Investment; Information Frictions; Financing Constraints; Crisis
JEL Classification: G01; G14; G31; G32; G34; M41working papers series
Date posted: November 1, 2011 ; Last revised: November 23, 2013
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