Accounting Conservatism and Firm Investment Efficiency
Journal of Accounting and Economics, Forthcoming
47 Pages Posted: 16 Apr 2009 Last revised: 7 Jul 2015
Date Written: July 6, 2015
We argue that conservatism improves investment efficiency. In particular, we predict that it resolves debt-equity conflicts, facilitating a firm’s access to debt financing and limiting underinvestment. This permits the financing of prudent investments that otherwise might not be pursued. Our empirical results confirm these predictions. We find that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries. We also find that conservatism is associated with reduced overinvestment, even for opaque investments such as research and development.
Keywords: Conservatism; asymmetric timeliness of earnings; investment efficiency; overinvestment; underinvestment
JEL Classification: G10, G31, M41
Suggested Citation: Suggested Citation
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