Managerial myopia and the unintended real consequences of conditional conservatism

Abstract

We examine whether the demand for conditional conservatism produces unintended real consequences that are exacerbated by managerial incentives to report higher earnings. We document a robust positive association between conditional conservatism and real earnings management (REM), particularly for firms whose CEOs face greater compensation incentives and capital market incentives to report higher earnings. Using mediation analyses, we find that conservatism has a negative indirect relation with future returns via REM over the next 1-3 years. In additional tests, we find that the relation between conservatism and REM is attenuated for firms with higher debt-to-equity, which suggests that debtholders moderate the negative relation between conditional conservative reporting and REM. Our findings suggest that, in contrast to its monitoring benefit, conditional conservatism can exacerbate managerial myopia, resulting in negative consequences for future firm value.

The Influence of Managerial Myopia on Corporate Green Innovation: An Empirical Analysis of A-Share Listed Firms (2012-2021)

“…Corporate executives, with their abbreviated decision-making horizons, are inclined to opt for capital projects promising substantial short-term profits, consequently curtailing long-term investments to maximize short-term financial performance. Specifically, management is likely to reduce expenditures on research and development, innovation, advertising, and employee training [15], diminish long-term asset investments like fixed assets, and also lower the depreciation and amortization expenses associated with the acquisition of long-term assets [16]. Innovation in enterprises necessitates continuous capital investment, where judicious and effective capital allocation is crucial for sustaining innovation and long-term development.…”