Accounting conservatism and firm investment efficiency Articles uri icon

publication date

  • February 2016

start page

  • 221

end page

  • 238

issue

  • 1

volume

  • 61

International Standard Serial Number (ISSN)

  • 0165-4101

Electronic International Standard Serial Number (EISSN)

  • 1879-1980

abstract

  • We argue that conservatism improves investment efficiency. In particular, we predict that it resolves debt-equity conflicts, facilitating a firm's access to debt financing and limiting under investment. This permits the financing of prudent investments that otherwise might not be pursued. Our empirical results confirm these predictions. We find that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries. We also find that conservatism is associated with reduced overinvestment, even for opaque investments such as research and development.

keywords

  • conservatism; earnings asymmetric timeliness; investment efficiency; under-investment; over-investment