The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis
London Business School
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Cornell University - Samuel Curtis Johnson Graduate School of Management
May 12, 2016
Journal of Business Finance and Accounting, Forthcoming
This paper examines the effect of accounting conservatism on firm-level investment during the 2007-2008 global financial crisis. Using a differences-in-differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more conservative financial reporting. This relation is stronger for firms that were financially constrained, faced greater external financing needs, or had 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: Accounting Conservatism; Investment; Information Frictions; Financing Constraints; Crisis
JEL Classification: G01; G14; G31; G32; G34; M41
Date posted: November 1, 2011 ; Last revised: May 13, 2016
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