Accounting conservatism and managerial risk-taking: Corporate acquisitions

Todd D. Kravet

Journal of Accounting and Economics, 2014, vol. 57, issue 2, 218-240

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.

Keywords: Mergers and acquisitions; Accounting conservatism; Risk-taking; Investment; Debt covenants (search for similar items in EconPapers)
JEL-codes: G34 M40 M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:57:y:2014:i:2:p:218-240

DOI: 10.1016/j.jacceco.2014.04.003

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