The Stewardship Role of Conservatism

36 Pages Posted: 28 Dec 2017

See all articles by Pei-Cheng Liao

Pei-Cheng Liao

National Taiwan University - Department of Accounting

Guang Ma

McGill University - Desautels Faculty of Management

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: December 15, 2017

Abstract

We consider conservative reporting and investment decisions in the context of the hidden-information problem of unknown manager-type as well as the hidden-action problem of the diversion of resources. When either the hidden-information problem or the hidden-action problem exists, conservative reporting is not optimal. When both the hidden-information and hidden-action problems exist, conservative reporting is optimal for the high-productivity manager. Specifically, when conservatism is part of the high-productivity manager’s incentive package, it mitigates the problem of the diversion of resources by the low-productivity manager, and thus, is part of the stewardship role of accounting.

Keywords: adverse selection, tunneling, resource diversion, conservatism

JEL Classification: D82, D86, M41

Suggested Citation

Liao, Pei-Cheng and Ma, Guang and Radhakrishnan, Suresh, The Stewardship Role of Conservatism (December 15, 2017). Available at SSRN: https://ssrn.com/abstract=3088944 or http://dx.doi.org/10.2139/ssrn.3088944

Pei-Cheng Liao

National Taiwan University - Department of Accounting ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan
+886-2-33661127 (Phone)
+886-2-23638038 (Fax)

Guang Ma

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5
514-398-5075 (Phone)

HOME PAGE: http://guangma.info

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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