The Benefits of Conservative Accounting to Shareholders: Evidence from the Financial Crisis

Abstract

Using the current financial crisis as a natural quasi-experiment, we test whether and to what extent conservative accounting affects shareholder value. We find that there is a positive association between conservatism and firm stock performance during the current crisis. The result holds for alternative measures of conservatism and is validated in a series of robustness checks. We further find that the relation between conservatism and stock performance is more pronounced for firms with higher information asymmetry. Overall, our paper complements LaFond and Watts (2008) by providing empirical evidence to their argument that conservatism is an efficient governance mechanism to mitigate information risk and control for agency problems, and that shareholders benefit from it.

Keywords: accounting conservatism, shareholder value, financial crisis

JEL Classification: M41, M48, G01