The benefits of conservative accounting to shareholders: Evidence from the financial crisis

Bill Francis, Iftekhar Hasan, Qiang Wu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

49 Citations (Scopus)

Abstract

Using the recent financial crisis as a natural quasi-experiment we test whether, and to what extent, conservative accounting affects shareholder value. We find that there is a significantly positive and economically meaningful relation between conservatism and firm stock performance during the current crisis. The result holds for alternative measures of conservatism and is validated in a series of robustness checks. We further find that the relation between conservatism and firm value is more pronounced for firms with weaker corporate governance or higher information asymmetry. Overall, our paper complements LaFond and Watts (2008) by providing empirical evidence to their argument that conservatism is an efficient governance mechanism to mitigate information risk and control for agency problems, and that shareholders benefit from it.

Original languageEnglish
Pages (from-to)319-346
Number of pages28
JournalAccounting Horizons
Volume27
Issue number2
DOIs
Publication statusPublished - Jun 2013
Externally publishedYes

Keywords

  • Accounting conservatism
  • Financial crisis
  • Shareholder value

ASJC Scopus subject areas

  • Accounting

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