Managerial Risk Aversion and Accounting Conservatism

François Larmande () and Hervé Stolowy ()

No 1215, HEC Research Papers Series from HEC Paris

Abstract: This paper investigates the link between one managerial characteristic, the degree of risk aversion, and accounting conservatism. Two models are analyzed, one where the degree of conservatism is chosen by the principal (Board) and accounting information is used for stewardship, and a second where the principal delegates the choice of the degree of conservatism to the manager and accounting information is primarily used for investment efficiency. We show in the first model that higher risk aversion reduces the demand for conservatism from a stewardship point of view. In the second model, we show that delegation is an optimal way for the principal of committing to conservative reporting. Hiring a more risk-averse manager lowers the cost of implementing this conservative reporting. The two models provide opposite predictions for the association between managerial risk aversion and the degree of conservatism. Empirical evidence favors the second model’s prediction. The paper suggests that managers with specific characteristics and incentive contracts might be endogenously chosen by the firm to implement an ex-ante optimal degree of conservatism.

Keywords: Accounting Conservatism; Risk Aversion; Limited Liability; Reporting Bias; Principal-Agent Theory; Stewardship; Investment Efficiency (search for similar items in EconPapers)
JEL-codes: D82 D86 G30 M41 M51 M52 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017-06-01, Revised 2017-07-27
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-hrm and nep-upt
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Working Paper: Managerial Risk Aversion and Accounting Conservatism (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1215

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