The Risk Management Role of Accounting Conservatism for Operating Cash Flows

49 Pages Posted: 23 Oct 2010 Last revised: 13 Jan 2015

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia Business School; HKU Business School; London Business School

Mary L. Z. Ma

York University

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Date Written: September 25, 2013

Abstract

This study examines whether accounting conservatism plays a risk management role with respect to operating cash flow downside risk, a key focus of risk management theory and practice. Unconditional (conditional) accounting conservatism is found to substitute for (complement) hedging in mitigating operating cash flow downside risk, consistent with its ex ante (ex post) application. As confirming evidence, we further document that accounting conservatism helps mitigate operating cash flow downside risk by reducing supply chain related operational risk. These findings lend support to a risk management role for accounting conservatism relevant to related literatures and continuing debates regarding conservatism’s role as a pervasive and longstanding property of financial accounting.

Keywords: accounting conservatism, risk management, cash flow downside risk, corporate hedging

JEL Classification: G1, M41, G32

Suggested Citation

Biddle, Gary C. and Ma, Mary L. Z. and Song, Frank M., The Risk Management Role of Accounting Conservatism for Operating Cash Flows (September 25, 2013). Available at SSRN: https://ssrn.com/abstract=1695629 or http://dx.doi.org/10.2139/ssrn.1695629

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, Dept of Accounting
198 Berkeley Street, Carlton
Melbourne, Victoria 3010 3010
Australia
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HOME PAGE: http://https://findanexpert.unimelb.edu.au/profile/774767-gary-biddle

Columbia Business School ( email )

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HKU Business School ( email )

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London Business School ( email )

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Mary L. Z. Ma (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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