Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions
Posted: 26 Jan 2010 Last revised: 27 Aug 2014
Date Written: April 14, 2014
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, debt covenants
JEL Classification: G34, M40, M41
Suggested Citation: Suggested Citation