The benefits of conservative accounting to shareholders: Evidence from the financial crisis

Bill Francis, Iftekhar Hasan and Qiang Wu

No 8/2013, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: Using the recent financial crisis as a natural quasi-experiment, we test whether and to what extent conservative accounting affects shareholder value. We find that there is significantly positive and economically meaningful relation between conservatism and firm stock performance during the current crisis. The result holds for alternative measures of conservatism and is validated in a series of robustness checks. We further find that the relation between conservatism and firm value is more pronounced for firms with weaker corporate governance or higher information asymmetry. Overall, our paper complements LaFond and Watts (2008) by providing empirical evidence to their argument that conservatism is an efficient governance mechanism to mitigate information risk and control for agency problems, and that shareholders benefit from it.

Keywords: Accounting conservatism; Shareholder value; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 M41 M48 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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