The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis

Journal of Business Finance and Accounting, Forthcoming

45 Pages Posted: 1 Nov 2011 Last revised: 4 Jul 2016

Karthik Balakrishnan

London Business School

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2016

Abstract

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 was 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.

Keywords: Accounting Conservatism; Investment; Information Frictions; Financing Constraints; Crisis

JEL Classification: G01; G14; G31; G32; G34; M41

Suggested Citation

Balakrishnan, Karthik and Watts, Ross L. and Zuo, Luo, The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis (July 2, 2016). Journal of Business Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1952722 or http://dx.doi.org/10.2139/ssrn.1952722

Karthik Balakrishnan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

Luo Zuo (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

349 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile/id/lz352

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