Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions

Posted: 26 Jan 2010 Last revised: 27 Aug 2014

See all articles by Todd D. Kravet

Todd D. Kravet

University of Connecticut - Department of Accounting

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

Kravet, Todd D., Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions (April 14, 2014). Journal of Accounting & Economics (JAE), Vol. 57, No. 2-3, 218-240, Available at SSRN: https://ssrn.com/abstract=1542117 or http://dx.doi.org/10.2139/ssrn.1542117

Todd D. Kravet (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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