Accounting Conservatism and Firm Investment Efficiency
Juan M. Garcia Lara () and
Additional contact information
Juan M. Garcia Lara: Department of Business Administration Universidad Carlos III de Madrid
Fernando Penalva: IESE Business School, University of Navarra.
No 1004, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona
Conservatism, through the timelier recognition of l osses in the income statement, is expected to increase firm investment efficiency through three main channels: (1) by decreasing the adverse effect of information asymmetries between outside equity holders and managers, facilitating the monitoring of managerial investment decisions; (2) by increasing managerial incentives to abandon poorly performing projects earlier and to undertake fewer negative net present-value investments; and (3) by facilitating the access to external financing at lower cost. Using a large US sample for the period 1990-2007 we find a negative association between conservatism and measures of over- and under- investment, and a positive association between conservatism and future profitability. This is consistent with firms reporting more conservative numbers investing more efficiently and in more profitable projects. Our results add to a growing stream of literature suggesting that eliminating conservatism from accou nting regulatory frameworks may lead to undesirable economic consequences.
Keywords: Conservatism; earnings asymmetric timeliness; inves tment efficiency; overinvestment; underinvestment. (search for similar items in EconPapers)
JEL-codes: G10 G31 M41 (search for similar items in EconPapers)
Date: 2010-01, Revised 2010-01
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Published in Working Papers at the Department of Business, January pages 1-60
Downloads: (external link)
http://www.uab.cat/servlet/BlobServer?blobtable=Do ... 319&blobnocache=true Revised version, 2010 (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bbe:wpaper:1004
Access Statistics for this paper
More papers in Working Papers from Departament Empresa, Universitat Autònoma de Barcelona
Series data maintained by Departament Empresa ().