Real effects of auditor conservatism

Mahfuz Chy () and Ole-Kristian Hope ()
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Mahfuz Chy: University of Missouri
Ole-Kristian Hope: University of Toronto

Review of Accounting Studies, 2021, vol. 26, issue 2, No 9, 730-771

Abstract: Abstract We examine the effect of auditor conservatism on corporate innovation. We hypothesize that, because conservative auditors constrain income-increasing accounting discretion, managers may sacrifice long-term investments in innovation to boost current earnings and meet short-term performance targets. Exploiting state-level auditor legal liability shocks as a means of identification, we find evidence consistent with this hypothesis. Cross-sectional analyses reveal that the negative effect of increased auditor conservatism on corporate innovation is more pronounced when the client firms are under greater equity- and debt-market pressures, when the client firms are exposed to greater litigation risk, and when the client firms are audited by large auditors. Our study highlights how auditors, as external monitors, can affect not only the financial reporting quality of their clients but may also induce alterations in their real operations.

Keywords: Innovation; Patents; Citations; R&d; Short-termism; Auditor conservatism; Real effects; State legal liability laws; Financial reporting discretion; Going-concern opinions (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s11142-020-09568-3

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