Accounting Conservatism and Firm Investment Efficiency

García Lara, Juan M.; Garcia Osma, Beatriz; Penalva, Fernando

doi:10.2139/ssrn.1383642

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Accounting Conservatism and Firm Investment Efficiency

Journal of Accounting and Economics, Forthcoming

47 Pages Posted: 16 Apr 2009 Last revised: 7 Jul 2015

See all articles by Juan M. García Lara

Beatriz Garcia Osma

Universidad Carlos III de Madrid ; European Corporate Governance Institute (ECGI)

Fernando Penalva

IESE Business School - University of Navarra; European Corporate Governance Institute (ECGI)

Date Written: July 6, 2015

Abstract

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

García Lara, Juan Manuel and Garcia Osma, Beatriz and Penalva, Fernando, Accounting Conservatism and Firm Investment Efficiency (July 6, 2015). Journal of Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1383642 or http://dx.doi.org/10.2139/ssrn.1383642