Managerial Myopia and the Unintended Real Consequences of Conditional Conservatism
Forthcoming, Journal of Business Finance & Accounting
64 Pages Posted: 11 May 2022 Last revised: 23 Jan 2023
Date Written: November 15, 2022
Abstract
We examine whether the demand for conditional conservatism produces unintended real consequences that are exacerbated by managerial incentives to report higher earnings. We document a robust positive association between conditional conservatism and real earnings management (REM), particularly for firms whose CEOs face greater compensation incentives and capital market incentives to report higher earnings. Using mediation analyses, we find that conservatism has a negative indirect relation with future returns via REM over the next one to three years. In additional tests, we find that the relation between conservatism and REM is attenuated for firms with higher debt-to-equity, which suggests that debtholders moderate the negative relation between conditional conservative reporting and REM. Our findings suggest that, in contrast to its monitoring benefit, conditional conservatism can exacerbate managerial myopia, resulting in negative consequences for future firm value.
Keywords: conditional conservatism; real earnings management; myopia; managerial compensation; capital market pressure; future returns
JEL Classification: G10, G32, M41, M52
Suggested Citation: Suggested Citation