Managerial Risk Aversion and Accounting Conservatism

46 Pages Posted: 28 Jun 2017 Last revised: 7 Jul 2017

See all articles by Francois Larmande

Francois Larmande

HEC Paris - Accounting and Management Control Department

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

Date Written: June 27, 2017

Abstract

This paper investigates the link between one managerial characteristic, the degree of risk aversion, and accounting conservatism. Two models are analyzed, one where the degree of conservatism is chosen by the principal (Board) and accounting information is used for stewardship, and a second where the principal delegates the choice of the degree of conservatism to the manager and accounting information is primarily used for investment efficiency. We show in the first model that higher risk aversion reduces the demand for conservatism from a stewardship point of view. In the second model, we show that delegation is an optimal way for the principal of committing to conservative reporting. Hiring a more risk-averse manager lowers the cost of implementing this conservative reporting. The two models provide opposite predictions for the association between managerial risk aversion and the degree of conservatism. Empirical evidence favors the second model’s prediction. The paper suggests that managers with specific characteristics and incentive contracts might be endogenously chosen by the firm to implement an ex-ante optimal degree of conservatism.

Keywords: Accounting Conservatism, Risk Aversion, Limited Liability, Reporting Bias, Principal-Agent Theory, Stewardship, Investment Efficiency

JEL Classification: D82, D86, G30, M41, M51, M52

Suggested Citation

Larmande, Francois and Stolowy, Hervé, Managerial Risk Aversion and Accounting Conservatism (June 27, 2017). HEC Paris Research Paper No. FIN-2017-1215. Available at SSRN: https://ssrn.com/abstract=2993124 or http://dx.doi.org/10.2139/ssrn.2993124

Francois Larmande (Contact Author)

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas
France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

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