Capital Allocation and Timely Accounting Recognition of Economic Losses

Abstract

This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country's accounting regime. We explicitly investigate the extent to which TLR influences investment decisions of firm managers. Given the asymmetric emphasis on negative outcomes inherent in TLR, we hypothesize that TLR will most strongly influence investment behavior when managers face deteriorating investment environments. We conjecture that TLR will have an asymmetric impact on investment behavior whereby TLR impacts firms' investment decisions in the face of declining investment opportunities, but not in the face of increasing in investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industrylevel, and firm-level variables that may impact firms' investment decisions.

Accounting Conservatism Alleviates Firm’s Investment Efficiency: An Evidence from China

“…0.0407 and t-stat 22.90). Our results are consistent with prior research that conservatism increases the free cash flow (FCashf) which is also positively significant with conservatism and these finding shows conservatism improves firm investment efficiency (save firm from underinvestment's) [25]. In line of the same stream of research, current paper are examining association of conservatism and investment efficiency.…”

“…As old and recent empirical studies examined conservatism and investment efficiency and documented that accounting conservatism improves investment efficiency, in line with prior reported literature [25,15,17,18,19] find that accounting conservatism improves investment efficiency. We find that accounting conservatism is positively significant with investment efficiency at 1% level (coeff.…”

“…Free cash flow has negative association with overinvestment which shows that by increasing free cash flow then overinvestment will decrease. As prior researchers [25,15] showed that free cash flow increases investment efficiency and improves firms from underinvestment. In other words, conservatism enhances or reduces free cash flow among investments.…”

“…Our model specification is based on prior studies on similar lines [25,17,18,15,19,13]. First, we measure the conservatism by using a model proposed by [1] with slight modifications [38] at year firm level and then examine the relation of conservatism with investment efficiency, including the sample size used for this study.…”

“…Many others investigated the conservatism at a country level, which associated with investment efficiency [25,26]. The literature related to investment efficiency may influence to raise the quality of reporting.…”