The Risk Management Role of Accounting Conservatism for Operating Cash Flows
49 Pages Posted: 23 Oct 2010 Last revised: 13 Jan 2015
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: Suggested Citation