Accounting Conservatism and Managers' Investment Decisions

Abstract

The role of accounting conservatism in corporate governance to mitigate agency problems associated with managers' investment decisions is proposed by Watts (2003), Ball and Shivakumar (2005) and Ahmed and Duellman (2010). In this research, we hypothesize that if accounting conservatism reduces managers' incentives to take on negative NPV projects and it can lead to corrective actions such as abandonment of a negative NPV Project, firms with more accounting conservatism ought to have higher future profitability. So we examined this hypothesis in companies listed in Tehran Stock Exchange over the period 2001-2010. The findings show no significant relationship between accounting conservatism and future profitability. These results are not consistent with Ahmed and Duellman's (2010) findings.