Real Effects of Auditor Conservatism

58 Pages Posted: 27 Jun 2016 Last revised: 5 Mar 2023

See all articles by Mahfuz Chy

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 18, 2020

Abstract

We examine the effect of auditor conservatism on corporate innovation. We hypothesize that because conservative auditors constrain income-increasing accounting discretion, managers may sacrifice long-term investments in innovation to boost current earnings and meet short-term performance targets. Exploiting state-level auditor legal liability shocks as a means of identification, we find evidence consistent with this hypothesis. Cross-sectional analyses reveal that the negative effect of increased auditor conservatism on corporate innovation is more pronounced when the client firms are under greater equity- and debt-market pressures, when the client firms are exposed to greater litigation risk, and when the client firms are audited by large auditors. Our study highlights how auditors, as external monitors, can affect not only the financial reporting quality of their clients, they may also induce alterations in their real operations.

Keywords: Innovation; Patents; Citations; R&D; Short-termism; Auditor conservatism; Real effects; State legal liability laws; Financial reporting discretion; Going-concern opinions

JEL Classification: M41, O31, O32, G31, G38

Suggested Citation

Chy, Mahfuz and Hope, Ole-Kristian, Real Effects of Auditor Conservatism (February 18, 2020). Rotman School of Management Working Paper No. 2801183, 28th Annual Conference on Financial Economics and Accounting, Available at SSRN: https://ssrn.com/abstract=2801183 or http://dx.doi.org/10.2139/ssrn.2801183

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,086
Abstract Views
5,814
Rank
31,755
PlumX Metrics