Managerial risk incentives and accounting conservatism

Chengru Hu () and Wei Jiang
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Chengru Hu: The State University of New York – Canton
Wei Jiang: California State University – Fullerton

Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 3, No 5, 813 pages

Abstract: Abstract We provide empirical evidence of the effect of managerial risk incentives on financial reporting conservatism. We hypothesize that firms use greater accounting conservatism as a means of addressing increased firm risk arising from excessive managerial risk incentives provided by option compensation. Consistent with this hypothesis, we find a positive association between excessive managerial risk incentives and accounting conservatism measured as asymmetric timeliness of loss recognition. By contrast, we find no impact by normal (anticipated) risk-taking on accounting conservatism. Further analysis shows that the association between excessive managerial risk incentives and accounting conservatism is more pronounced when firms face more severe debtholder–shareholder conflicts. We also find that while cost of debt financing is positively associated with both anticipated and excessive risk incentives, the relationship with the latter is weakened by timelier loss recognition, suggesting firms with heightened risk incentives could economically benefit from using more conservative accounting.

Keywords: Conditional accounting conservatism; Timely loss recognition; Risk-taking incentives; Executive compensation (search for similar items in EconPapers)
JEL-codes: M1 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11156-018-0726-5

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