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The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis


Karthik Balakrishnan


London Business School

Ross L. Watts


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo


Cornell University - Samuel Curtis Johnson Graduate School of Management

May 16, 2014

MIT Sloan Research Paper No. 4941-11

Abstract:     
This paper examines the effect of accounting conservatism on firm-level investment during the 2007-2008 global financial crisis. Using a differences-in-differences setup, we find that firms with less conservative accounting experienced a sharper decline in investment activity following the onset of the crisis than firms with more conservative accounting. This relation is stronger for firms that are financially constrained, face greater external financing needs, or have higher information asymmetry. We also find that more conservative firms experienced lower declines in both debt raising activity and stock performance. The evidence suggests that accounting conservatism reduces underinvestment in the presence of information frictions.

Number of Pages in PDF File: 45

Keywords: Financial Reporting; Accounting Conservatism; Investment; Information Frictions; Financing Constraints; Crisis

JEL Classification: G01; G14; G31; G32; G34; M41

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Date posted: November 1, 2011 ; Last revised: May 17, 2014

Suggested Citation

Balakrishnan, Karthik and Watts, Ross L. and Zuo, Luo, The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis (May 16, 2014). MIT Sloan Research Paper No. 4941-11. Available at SSRN: http://ssrn.com/abstract=1952722 or http://dx.doi.org/10.2139/ssrn.1952722

Contact Information

Karthik Balakrishnan
London Business School ( email )
Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E52-325
Cambridge, MA 02142
United States
Luo Zuo (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
362 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=lz352

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