Accounting conservatism and firms’ investment decisions

Jungeun Cho, Won W. Choi

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study examines the effectiveness of accounting conservatism in monitoring and controlling managers’ decision-making regarding opportunistic investment. We find that accounting conservatism is negatively associated with over-investment. This suggests that conservative accounting policies serve as an efficient monitoring and controlling mechanism for opportunistic investment decisions. We also find a stronger negative association between accounting conservatism and over-investment in firms with low managerial ownership and low ownership by foreign investors. The results of our analysis imply that the impact of timely loss recognition on over-investment is more significant in firms with high agency problems and weaker monitoring ability, and that this factor complements other governance mechanisms, thereby helping to control managers’ myopic investment decisions. We provide evidence for a role of financial disclosure in mitigating managers’ opportunistic over-investment decisions. Though managers’ overinvestment decisions are motivated by private gain, which reduces firm performance and compromises investors’ welfare, limited research exists on the role of financial information in alleviating such behavior. We suggest that timely loss recognition in financial statements can serve as an effective monitoring mechanism to aid in control of managers’ myopic over-investment.

Original languageEnglish
Pages (from-to)1223-1236
Number of pages14
JournalJournal of Applied Business Research
Volume32
Issue number4
DOIs
Publication statusPublished - 2016 Jul 1

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Firm investment
Investment decision
Accounting conservatism
Accounting firms
Overinvestment
Managers
Monitoring
Managerial ownership
Financial statements
Financial information
Governance mechanisms
Ownership
Financial disclosure
Accounting policy
Firm performance
Investors
Agency problems
Conservative accounting
Decision making
Factors

All Science Journal Classification (ASJC) codes

  • Business and International Management

Cite this

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Accounting conservatism and firms’ investment decisions. / Cho, Jungeun; Choi, Won W.

In: Journal of Applied Business Research, Vol. 32, No. 4, 01.07.2016, p. 1223-1236.

Research output: Contribution to journalArticle

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