Evidence on the Role of Accounting Conservatism in Monitoring Managers’ Investment Decisions

25 Pages Posted: 3 Aug 2011

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Scott Duellman

Saint Louis University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: September 2011

Abstract

Watts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers’ investment decisions. We hypothesize that if conservatism reduces managers’ ex ante incentives to take on negative net present value projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting.

Keywords: Accounting conservatism, Corporate governance, Agency costs

JEL Classification: G3, M41

Suggested Citation

Ahmed, Anwer S. and Duellman, Scott, Evidence on the Role of Accounting Conservatism in Monitoring Managers’ Investment Decisions (September 2011). Accounting & Finance, Vol. 51, Issue 3, pp. 609-633, 2011. Available at SSRN: https://ssrn.com/abstract=1904119 or http://dx.doi.org/10.1111/j.1467-629X.2010.00369.x

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

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