Value of Cash Holdings and Accounting Conservatism*

Louis, Henock; Sun, Amy X.; Urcan, Oktay

doi:10.1111/j.1911-3846.2011.01149.x

Cited by 121 publications

(105 citation statements)

References 58 publications

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“…Given top executives' relatively short tenure, their incentives to expand their "empires" and undertake negative-NPV projects decrease when losses are recognized early. Consistent with the notion that conservatism reduces the agency problem associated with free cash flows, Louis, Sun, and Urcan (2012) find that the market value of cash holdings increases in conservatism. If conservatism reduces managers' incentives to waste their cash on value-destroying projects, and if shareholders' demand for dividends is motivated by their need to prevent managers from wasting firms' funds on such projects, then that demand should be reduced when a firm adopts conservative reporting policies.…”

Section: The Substitution Effectsupporting

confidence: 63%

Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity‐Holders

Louis

Urcan

2014

Contemporary Accting Res

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Section: The Substitution Effectsupporting

confidence: 63%

Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity‐Holders

Louis

Urcan

2014

Contemporary Accting Res

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“…The studies show that higher conditionally conservative firms make more profitable acquisitions and divest poorly performing acquisitions earlier (Francis and Martin 2010), constrain managerial misuse of cash-holdings (Louis et al 2012), have a higher future cash flows and gross margins and lower likelihood and magnitude of special items charges (Ahmed and Duellman 2011) or make more responsible bank lending decisions (Lim et al 2014). In countries where accounting is more conditionally conservative, investments are more sensitive to declining investment opportunities (Bushman et al 2011).…”

Section: Investment Decisionsmentioning

confidence: 99%

The implications of research on accounting conservatism for accounting standard setting

Mora

Walker

2015

Accounting and Business Research

112

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This paper provides a commentary on the academic literature on accounting conservatism with a view to highlighting the insights of that literature that are potentially useful for accounting standard setters. We begin by introducing the basic concepts of conservatism focusing on the distinction between conditional and unconditional conservatism. We then briefly discuss the objectives of financial reporting and the economics of information, paying particular attention to the role of stewardship in the Conceptual Framework, and the economic concepts of adverse selection and moral hazard. The two middle sections of the paper provide overviews of, respectively, the theoretical and empirical literatures on accounting conservatism. Having summarised the theoretical and empirical literatures, we then try to synthesis the implications of the literature for standard setters, paying particular attention to understanding the costs and benefits of conservatism, implications for the Conceptual Framework, highlighting the particular demands of public debt markets for conservatism, and explaining how accounting standards might be adapted to allow some degree of flexibility in conservative accounting choice. The final section discusses the limitations of the academic literature from the practical point of view of standard setters, and highlights areas for new research that may be of more direct value for policy-making.

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“…We provide definitions of the three firm-year measures of conservatism in the Appendix. Following prior studies (Garcia Lara et al 2011;Louis, Sun, and Urcan 2012), we use the annual decile ranks of each of the three conservatism measures to reduce noise in the estimates and to mitigate concerns with nonlinearity. We standardize these decile ranks to range between zero and one, with observations in the bottom decile taking the value of zero and observations in the top decile taking the value of one.…”

Section: Firm-year Proxies For Conditional Conservatismmentioning

confidence: 99%

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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Value of Cash Holdings and Accounting Conservatism*

Cited by 121 publications

References 58 publications

Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity‐Holders

Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity‐Holders

The implications of research on accounting conservatism for accounting standard setting

Conditional Conservatism and Debt versus Equity Financing

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