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

47 Pages Posted: 9 Jul 2013

See all articles by Bill Francis

Bill Francis

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

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2013

Abstract

Using the recent financial crisis as a natural quasi-experiment, we test whether and to what extent conservative accounting affects shareholder value. We find that there is significantly positive and economically meaningful relation 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 firm value is more pronounced for firms with weaker corporate governance or 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

Francis, Bill and Hasan, Iftekhar and Wu, Qiang, The Benefits of Conservative Accounting to Shareholders: Evidence from the Financial Crisis (May 20, 2013). Bank of Finland Research Discussion Paper No. 8/2013. Available at SSRN: https://ssrn.com/abstract=2291352 or http://dx.doi.org/10.2139/ssrn.2291352

Bill Francis (Contact Author)

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

Qiang Wu

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)

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