Journal of Accounting and Economics Vol. 57 No. 2-3 2014
Accounting conservatism and managerial risk-taking: Corporate acquisitions
Abstract
Watts (2003) and Ball and Shivakumar (2005) argue that accounting conservatism decreases managerial incentives to make negative net present value investments. I develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments. I find that under more conservative accounting managers make less risky acquisitions and that firms with accounting-based debt covenants drive this association. This result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants. Conservatism reducing risk-shifting can in part explain debt holders׳ demand for conservative accounting.
- DOI
- 10.1016/j.jacceco.2014.04.003
- Volume
- 57
- Issue
- 2-3
- Pages
- 218-240
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref