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

Posted: 9 Dec 2011 Last revised: 17 Jun 2013

See all articles by Qiang Wu

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2009

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

Suggested Citation

Wu, Qiang and Francis, Bill and Hasan, Iftekhar, The Benefits of Conservative Accounting to Shareholders: Evidence from the Financial Crisis (October 1, 2009). Accounting Horizons, 2013, 27(2): 319-346. Available at SSRN: https://ssrn.com/abstract=1970102 or http://dx.doi.org/10.2139/ssrn.1970102

Qiang Wu (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

110 8th St
Troy, NY 12180
United States
518-276-3338 (Phone)
518-276-8661 (Fax)

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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