Evidence on the role of accounting conservatism in monitoring managers' investment decisions Academic Article uri icon

abstract

  • Watts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers' investment decisions. We hypothesize that if conservatism reduces managers'ex ante incentives to take on negative net present value projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting. 2010 The Authors. Accounting and Finance 2010 AFAANZ.

published proceedings

  • ACCOUNTING AND FINANCE

author list (cited authors)

  • Ahmed, A. S., & Duellman, S.

citation count

  • 109

complete list of authors

  • Ahmed, Anwer S||Duellman, Scott

publication date

  • January 1, 2011 11:11 AM

publisher