Hedge Fund Intervention and Accounting Conservatism

55 Pages Posted: 6 Nov 2014 Last revised: 14 Mar 2015

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Henry He Huang

Yeshiva University - Sy Syms School of Business

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Date Written: September 14, 2013

Abstract

Hedge fund intervention has been associated with many positive corporate changes and is an important vehicle for informed shareholder monitoring. Effective monitoring has also been positively associated with accounting conservatism. Building upon these prior results, we predict an increase in accounting conservatism after hedge fund intervention. We use a large sample of hedge fund activist events and identify control firms with similar likelihoods of being targeted using the propensity score matching method to apply difference-in-difference tests. We find that when hedge fund activists have relatively large ownership and sufficient time to exert their monitoring power, target firms experience significant increases in conditional conservatism. CFO turnovers, upward/lateral auditor switches, and improvements in audit committee independence after intervention are accompanied by greater increases in conditional conservatism. Finally, we find greater increases in conditional conservatism when there is a lack of monitoring by dedicated institutional investors before the intervention. Our study suggests that hedge fund activists improve accounting monitoring tools and thus adds important new evidence on the effectiveness of shareholder monitoring on accounting practices.

Keywords: Hedge fund activism, corporate governance, institutional ownership

JEL Classification: G34, M41

Suggested Citation

Cheng, C.S. Agnes and Huang, Henry and Li, Yinghua, Hedge Fund Intervention and Accounting Conservatism (September 14, 2013). Contemporary Accounting Research, Vol. 32, pp. 392–421, 2015.. Available at SSRN: https://ssrn.com/abstract=2519286

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Henry Huang

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

Yinghua Li (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://wpcarey.asu.edu/people/profile/2386522

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