Information Consequences of Accounting Conservatism

Lara, Juan Manuel Garcı́a; Osma, Beatriz Garcı́a; Peñalva, Fernando

doi:10.1080/09638180.2014.882263

Cited by 78 publications

(52 citation statements)

References 71 publications

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“…Consistent with the finding of LaFond and Watts (), García Lara, Osma, and Penalva () document that conservatism results in lower information asymmetry and stock return volatility. In addition, Garcia Lara et al.…”

Section: Prior Literature and Hypothesis Developmentsupporting

confidence: 76%

Conditional Conservatism and Debt versus Equity Financing

Goh

Lim

Lobo

et al. 2016

Contemporary Accting Res

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Extant research suggests that conditional conservatism reduces information asymmetry between a firm and its shareholders as well as its debtholders. However, there is little evidence on whether conditional conservatism reduces information asymmetry differentially for shareholders and debtholders. We use the setting of a firm's choice between equity versus debt when it seeks a significant amount of external financing to examine this research question. We find that when firms raise a significant amount of external financing, the use of equity (versus debt) increases with the level of conservatism. We also find that the reduction in cost of equity associated with conservatism is greater for equity issuers than for debt issuers, but find no such difference when we examine cost of debt. In addition, we find that the positive effect of conservatism on the choice of equity issuance (versus debt issuance) is accentuated when the information asymmetry between the firm and its shareholders is more severe. Overall, our results suggest that conservatism reduces information asymmetry more between firms and shareholders than between firms and debtholders. Prudence conditionnelle et financement par emprunt ou par capitaux propres R ESUM E Selon les etudes existantes, la prudence conditionnelle r eduit l'asym etrie de l'information entre une soci et e et ses actionnaires de m^ eme que ses cr eanciers. Toutefois, rares sont les donn ees concluantes quant a savoir si cette r eduction de l'asym etrie de l'information attri-buable a la prudence conditionnelle diff ere pour les actionnaires et les cr eanciers. Pour etu-dier la question, les auteurs utilisent le contexte du choix d'une soci et e entre le financement par capitaux propres ou par emprunt lorsque ses besoins de financement externe sont importants. Ils constatent que, dans le cas des soci et es dont ces besoins sont importants, le recours aux capitaux propres (par opposition au recours a l'emprunt) augmente avec le degr e de prudence. Les auteurs observent egalement que la r eduction du co^ ut des capitaux propres associ ee a la prudence est plus importante dans le cas des soci et es emettrices d'ac-tions que dans celui des soci et es emettrices de titres de cr eance, mais ils ne rel event aucun ecart de cette nature pour ce qui est de co^ ut de la dette. Ils constatent en outre que * Accepted by Sudipta Basu. We thank Sudipta Basu, Patricia O'Brien, two anonymous reviewers, Zeyun l'incidence positive de la prudence sur le choix de l' emission d'actions (plut^ ot que de titres de cr eance) s'accentue lorsque l'asym etrie de l'information entre la soci et e et ses actionnai-res est plus marqu ee. Dans l'ensemble, les r esultats de l' etude semblent indiquer que la prudence r eduit davantage l'asym etrie de l'information entre les soci et es et les actionnaires qu'entre les soci et es et les cr eanciers.

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Section: Prior Literature and Hypothesis Developmentsupporting

confidence: 76%

Conditional Conservatism and Debt versus Equity Financing

Goh

Lim

Lobo

et al. 2016

Contemporary Accting Res

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“…Second, the 1‐year ahead change of cost of capital is regressed on the change of conditional conservatism. The change specification could also mitigate the effect from relatively static omitted variables (Garcia Lara et al., ). Table reports the results from the above specifications.…”

Section: Resultsmentioning

confidence: 99%

Accounting Conservatism and the Cost of Capital: An International Analysis

2015

Business Fin & Account

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This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. The findings are that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. The paper further explores the cross-sectional variation of the above relationships, finding that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. In addition, the paper finds that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.

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“…As a result, bad news flow into the market more quickly than unverifiable good news, reducing the risk that bad news will be hidden and accumulate (LaFond & Watts, 2008; Kim & Zhang, 2016), thereby reducing insiders' opportunities to profitably trade on bad news information. A growing body of research provides evidence consistent with this view that conservatism reduces the information asymmetry between insiders and outsiders (LaFond & Watts, 2008; Garcia Lara et al., 2014). For example, Francis et al.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 86%

“…Ultimately, more efficient prices benefit society as they lead to a more efficient allocation of resources. Therefore, we also add to the literature on the positive economic consequences of conditional conservatism (e.g., Ahmed, Billings, Morton, & Stanford‐Harris, 2002; Ahmed & Duellman, 2007, 2011; Zhang, 2008; Francis & Martin, 2010; Louis et al., 2012; Francis et al., 2013; Garcia Lara, Garcia Osma, & Penalva, 2014; Kim & Zhang, 2016).…”

Section: Introductionmentioning

confidence: 99%

Accounting conservatism and the profitability of corporate insiders

Khalilov

Osma

2020

Business Fin & Account

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We predict that accounting conservatism influences insiders' opportunities to speculate on good and bad news, and thus, insider trading profitability. We find that greater conditional (unconditional) conservatism is associated with lower (higher) insiders' profitability from sales. We find limited evidence that conservatism influences profitability from purchases. These findings are consistent with our hypotheses on the different informational roles of conditional and unconditional conservatism, and on the asymmetric influence of conservatism over the opportunities to speculate on good versus bad news. Our research design takes into consideration the endogenous nature of insiders' trading and conservatism. The results are robust to different measures of conservatism and a number of additional analyses. K E Y W O R D S conditional conservatism, insider trading sales and purchases, profitability from insider trading, unconditional conservatism J E L C L A S S I F I C AT I O N G30, M41

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Information Consequences of Accounting Conservatism

Cited by 78 publications

References 71 publications

Conditional Conservatism and Debt versus Equity Financing

Conditional Conservatism and Debt versus Equity Financing

Accounting Conservatism and the Cost of Capital: An International Analysis

Accounting conservatism and the profitability of corporate insiders

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