Managerial Myopia and the Unintended Real Consequences of Conditional Conservatism

Forthcoming, Journal of Business Finance & Accounting

Nanyang Business School Research Paper No. 22-15

64 Pages Posted: 11 May 2022 Last revised: 23 Jan 2023

See all articles by Byung Hun Chung

Byung Hun Chung

Nanyang Business School, Nanyang Technological University

Daniel W. Collins

University of Iowa - Department of Accounting

Jane Z. Song

University of Georgia - Terry College of Business

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

Chung, Byung Hun and Collins, Daniel W. and Song, Jane (Zhiyan), Managerial Myopia and the Unintended Real Consequences of Conditional Conservatism (November 15, 2022). Forthcoming, Journal of Business Finance & Accounting, Nanyang Business School Research Paper No. 22-15, Available at SSRN: https://ssrn.com/abstract=4105703 or http://dx.doi.org/10.2139/ssrn.4105703

Byung Hun Chung

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4979 (Phone)

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Jane (Zhiyan) Song

University of Georgia - Terry College of Business ( email )

J.M. Tull School of Accounting
610 S. Lumpkin St.
Athens, GA 30602
United States
30602 (Fax)

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