Accounting Conservatism and Managerial Information Acquisition

46 Pages Posted: 30 Jul 2020 Last revised: 19 Jul 2023

See all articles by Christian Laux

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

Volker Laux

University of Texas at Austin - McCombs School of Business

Date Written: July 18, 2023

Abstract

We study the interaction between optimal financial reporting rules and managers' incentives to gather additional information about firm performance. Accounting-based covenants transfer control rights to lenders, allowing them to take corrective actions. After the accounting report is released, the manager can exert effort to uncover whether the report is a false alarm or unduly optimistic. The manager's incentive to gather information stems from optimal incentive contracts and private benefits of control that she loses when the project is liquidated. We derive conditions under which managerial information acquisition renders conservative reporting optimal for shareholders and show that these conditions relax when the manager derives greater private benefits from the project or the cost of information acquisition declines. Our model provides novel explanations for existing empirical findings and offers new predictions with respect to covenant waivers, debt contract renegotiations, and the frequency of corrective actions.

Keywords: accounting conservatism, debt contracting, early warning, managerial information acquisition

Suggested Citation

Laux, Christian and Laux, Volker, Accounting Conservatism and Managerial Information Acquisition (July 18, 2023). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3642806 or http://dx.doi.org/10.2139/ssrn.3642806

Christian Laux

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Volker Laux (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX Texas 78712
United States

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