Accounting conservatism and firm investment efficiency

Juan Manuel García Lara, Beatriz Garcia Osma and Fernando Penalva

Journal of Accounting and Economics, 2016, vol. 61, issue 1, 221-238

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 underinvestment. 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 (search for similar items in EconPapers)
JEL-codes: G10 G31 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (129)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:61:y:2016:i:1:p:221-238

DOI: 10.1016/j.jacceco.2015.07.003

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