The Impact of Financial Constraints on Accounting Conservatism

Review of Business Managemenet (RBGN), v. 17, n. 57, 2015

15 Pages Posted: 8 Feb 2016 Last revised: 5 Nov 2017

See all articles by Gladyson Demonier

Gladyson Demonier

Independent

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES)

Patricia Maria Bortolon

Federal University of Espírito Santo

Date Written: September 1, 2015

Abstract

Objective – This study investigates the effects of financial constraints on the conservatism practices of Brazilian firms.

Design/methodology/approach – A sample totaling 1,086 observations of Brazilian publicly traded companies listed on BM&FBovespa was developed from 2000 to 2012. In the sample 106 observations were classified in condition of financially constrained according to the criteria related to lower dividends payout, large amount of cash and equivalents available and investment or capital expenditures (property, plant and equipment). We use Basu (1997) and Ball and Shivakumar (2005) models to investigate the relationship between financial constraints and accounting conservatism.

Findings – The results show financially constrained firms adopt less conditional conservatism practices on their accounting figures. In other words, those firms avoid to disclose losses trying to access more external funds, however, increasing information asymmetry.

Practical implications – The evidence of this study could be used by creditors and regulators to support new financing policies and risk monitoring through firms’ financial statements.

Originality/value – We empirically show that conditional conservatism practices are affected by financial constraints. Also, we develop an alternative way to classify companies in terms of financial constraints from a combination of three proxies traditionally applied in the literature such as cash and cash-equivalent, capital expenditure (property, plant and equipment) and dividends payout.

Keywords: Financial constraints, Conditional Conservatism, Information asymmetry, Finance

JEL Classification: G32, G33, M41

Suggested Citation

Demonier, Gladyson and Almeida, Jose Elias Feres de and Bortolon, Patricia Maria, The Impact of Financial Constraints on Accounting Conservatism (September 1, 2015). Review of Business Managemenet (RBGN), v. 17, n. 57, 2015, Available at SSRN: https://ssrn.com/abstract=2728534

Gladyson Demonier

Independent ( email )

Jose Elias Feres de Almeida (Contact Author)

Federal University of Espirito Santo (UFES) ( email )

Av. Fernando Ferrari, n. 514, Goiabeiras
Centro de Ciências Jurídicas e Econômicas
Vitoria, Espírito Santo 29075-910
Brazil
+5527992248737 (Phone)

Patricia Maria Bortolon

Federal University of Espírito Santo ( email )

Av. Fernando Ferrari
No. 514, Goiabeiras
Vitória
Brazil

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