Conservative Firms Research Articles

A fall into the pit, a gain in your wit: Top managerial career setback experience and accounting conservatism

This study investigates the relationship between chief executive officers (CEOs) and chief financial officers (CFOs) with career setbacks and firms’ accounting conservatism. Using manually collected data from Chinese listed firms, this study finds that firms run by CEOs/CFOs who experienced career setbacks adopt more conservative accounting policies. In addition, the degree and timing of career setbacks and the experience of demotion and penalization by regulations affect CEOs’/CFOs’ decision-making. The results are robust to a battery of checks and analyses, including the propensity score matching procedure, the difference-in-differences method, and alternative measures. Further evidence suggests that the positive association between CEOs/CFOs with career setbacks and firms’ accounting conservatism is more pronounced at firms with better corporate governance, effective internal control, and higher financial constraints. This study also shows that financially conservative firms have more cash holding, which is positively correlated with career setbacks. JEL Classification: G34, M41, G41

The power of posture: organizational reputation following product failures and the role of entrepreneurial orientation

ABSTRACT Purpose The purpose of this research is to conceptually study the extent to which an entrepreneurial strategic posture intensifies or restrains the influence of a reputation-damaging event, namely, a product failure, on the subsequent Organizational Reputation. Much of the literature agrees on the idea that firms exhibiting an entrepreneurial behavior largely outperform more conservative firms, but the current research acknowledges a setting in which signaling a certain subdimension of entrepreneurial orientation can reduce or enhance the negative consequences of a product failure. Findings The current research offers propositions arguing that signals of an entrepreneurial orientation high in proactiveness, risk-taking, and innovativeness are likely to reduce the negative consumer-perceived Organizational Reputation resulting from a product failure, while signals high in competitive aggressiveness and autonomy are likely to trigger more severe negative perceptions of firm reputation. Research Limitations This research is limited by its focus on a specific setting, reputation-damaging events, and its focus on merely one strategic posture, entrepreneurial orientation. Another limitation is the lack of current empirical research to test our propositions. Contributions Integrating attribution and signaling theories contributes to the entrepreneurial orientation literature by recognizing a setting in which this type of strategic posture may prove to be detrimental to the firm.

Organizational Purpose, Ideology, and Carbon Emissions

Which characteristics make companies differ in their stances toward the reduction of carbon emissions? Carbon neutrality entails a drastic technological and organizational change, and specific internal drivers may endorse its effectiveness. Recent literature proposes that organizational purpose can function to advance organizational efforts towards sustainability; however, not much is known about the condition through which this relationship can be effective. In this paper, I build on the open polity perspective on organizations and propose that organizational carbon emissions reduction may stem from interactions between the prevailing values and beliefs among the body politic of the firm. Specifically, I look at organizational purpose and political ideology as explanatory variables towards reducing carbon emissions. I gathered data from Glassdoor reviews to measure employees' perception about the organization's purpose and the Federal Election Commission (FEC), which provides individual contributions to political parties. My preliminary results show that organizational purpose and ideology (i.e., liberal vs. conservative firms) alone do not explain significant differences towards CO2 reductions. However, when mediated, I find that liberal organizations with high employee perception of organizational purpose explain substantial reductions in carbon emissions.

Linking Strategic Management and Corporate Entrepreneurship for Firm Value Creation: A Developing Country Perspective

ABSTRACT The ever-increasing global business environment dynamism, change, and heterogeneity require a flexible, proactive, innovative, and aggressive managerial approach. The quest for such approaches settle strategic management and corporate entrepreneurship as a new firm‐level phenomenon that deserves scholarly attention. The subtle interaction of strategic management & corporate entrepreneurship has the potential of boosting firms’ capability to recognize, discover, and create entrepreneurial opportunities and develop them toward sustainable competitive advantages. The study followed an interpretive research philosophy, both exploratory and explanatory designs, quantitative approach, and survey method. The perceptions of corporate and strategic business unit level managers of 104 Ethiopian food processing firms established the study setting. We employed both exploratory and confirmatory factor analyses to identify a set of latent constructs underlying battery of measured variables and test if data fit the hypothesized measurement model, respectively. Results signpost locus of planning and strategic control influencing corporate entrepreneurship while environmental scanning did not. Moreover, planning flexibility, planning horizon, and financial control influenced only certain aspects of corporate entrepreneurship. We conclude a weak relationship between strategic management practice and intra-organizational entrepreneurship in conservative firms with little or no radical departure from historical and predominant structural patterns, characterized by superfluous, unplanned, and routine decisions.

The Concave Association between Tax Reserves and Equity Value

ABSTRACT This study examines the form of the association between tax reserves and firm value. I find firm value is increasing in tax reserves at a diminishing rate until an optimal level is reached, after which firm value is decreasing in tax reserves. This concave association is consistent with investors having a firm-specific, optimal level of tax reserves where the expected benefits equal the expected costs. Conditional conservatism moderates this association such that investors of conservative firms are less sensitive to changes in tax reserves. I also decompose firm value into the numerator (expectations of future cash flows) and the denominator (cost of capital) and find the numerator impact is the primary driver of the concave association between tax reserves and firm value. The results highlight the importance of understanding how investor valuation of tax reserves may vary depending on the current level of tax reserves.

Regulation of capital flows: Effects on liquidity and the role of financial reporting quality

Capital controls as restrictions on capital flows are a tool proposed as a cure to the destabilizing market movements of the 1970s (i.e., Tobin, 1978) despite the criticism that they have received (Edwards, 1999). Capital controls resurfaced during the European Financial Crisis and the restrictions imposed on capital flows in Cyprus and Greece. These were the first instances of capital control implementation in the European Union's history and had various effects on firms’ financial positions. By using a sample of EU countries and distinguishing between austerity and capital controls periods, we assess the effects of capital controls on the stock liquidity of firms. All of the sample countries have a common financial reporting framework (International Financial Reporting Standards -IFRS), and some of them implemented a range of different measures from less intensive, such as increases in tax rates, to more intensive, such as the enforcement of capital controls, in their effort to stabilize their economies. For the task at hand, we specifically engage two accounting determinants of information asymmetry, namely, conditional conservatism and the level of earnings management. Our results show that financial reporting quality as measured by higher conditional conservatism and lower earnings management is beneficial for liquidity. However, during the capital controls period, the relation between conditional conservatism and liquidity becomes negative, and this negative relation relates to less risky firms. Thus, the negative relation between conditional conservatism and liquidity is likely due to investors keeping more conservative firms in their portfolios as a measure against the crisis.

Target's Accounting Conservatism and the Gains from Acquisition

We present evidence on the benefits of accounting conservatism of the target firm in a merger and acquisition transaction. The use of conservative accounting serves as a mechanism that reduces the likelihood of acquiring underperforming assets for the acquirer, making the target more valuable due to the reduced risk. In addition, the monitoring benefit of accounting conservatism can increase the competition for the target in the acquisition market. Lastly, managers of conservative firms may be more risk averse and demand greater compensation to exit the firm. Consistent with these arguments, we find that the target’s accounting conservatism increases the deal premium received. Furthermore, we find that the target’s accounting conservatism increases the announcement returns for both the target and the acquirer. In support of acquiring firms having preference for conservative targets, we find that targets with greater accounting conservatism are more likely to receive bids. Overall, these results indicate that accounting conservatism provides benefits to both sellers and buyers of equity.

Accounting conservatism and money laundering risk

PurposeThis paper aims to investigate the relationship between accounting conservatism and money laundering risk. For this goal, the authors construct an index for measuring money laundering risk at the firm level for Iranian listed firms in the Tehran Stock Exchange.Design/methodology/approachIn this study, the authors use a sample of 924 firm-year observation of Iranian listed firms for the period of 2012-2017. The authors use three approaches for testing our prediction that more conservative firms are less likely to be involved in money laundering activities. A balanced panel regression model has been used for testing the prediction.FindingsThe paper results suggest that there is a negative relationship between conditional conservatism and money laundering risk. Furthermore, the authors have shown that the result is robust to controlling for different firm characteristics variables and also industry specific effects.Research limitations/implicationsFurther research in other financial markets is needed to confirm the results generally.Practical implicationsThe evidence in this paper indicates that the degree of accounting conservatism contains important information which can be used by the investors and regulators for managing and controlling the risk of money laundering in the firms.Originality/valueBy constructing a money laundering risk measure at the firm level for the first time, the authors provide evidence on relationship between conservatism and money laundering risk in Iran.

Unconditional Conservatism and Subsequent Real Earnings Management

By focusing on the more pervasive unconditional conservatism, we provide fresh insights on how conservatism can be detrimental to financial reporting quality. We examine whether unconditionally conservative (UC) firms engage in more real earnings management (REM) in order to meet or beat earnings benchmarks (MBE). UC firms are expected to be prudent with persistently lower earnings. REM, on the contrary, is an expensive way, with long-term consequences, of manipulating earnings upwards. As expected, we find UC firms display higher discretionary expenses. However, UC firms suspected of engaging in MBE cut back on these expenses (REM) by 0.5 to 2 percent of earnings. Our results reveal differences in manipulation strategies adopted across different organizational forms: group-affiliated UC firms use this strategy opportunistically. Stronger monitoring decreases the level of REM at UC firms. Additionally, accruals manipulation and insider ownership affect an UC firm’s REM choices. Thus, decisions to manage real earnings and choose conservative reporting policies may be intertwined, adding to the debate about conservatism reducing reporting quality. Our findings identify opportunistic behaviour and real costs associated with being conservative which is counter-intuitive and a serious regulatory concern that standard setters and policy makers should consider.

Customer Concentration, Tax Collection Intensity, and Corporate Tax Avoidance

ABSTRACT We investigate the influence of customer concentration on corporate tax avoidance based on non-financial firms listed on Chinese stock exchanges over the period 2009–2014. Our results show that firms with higher customer concentration are more likely to engage in tax avoidance, and this effect is greater at conservative tax avoidance firms. We also find that tax collection intensity can significantly attenuate the positive relationship between customer concentration and tax avoidance, which is more pronounced at conservative tax avoidance firms. The significantly attenuating effects of tax collection intensity exist at firms in highly competitive industries, and firms with low environmental uncertainty. Our results also show that easing financing constraints is one way to reduce customer concentration’s influence on tax avoidance. This evidence indicates that customer concentration is an important cause of tax avoidance, and tax collection intensity is an effective external governance mechanism at firms with large customers.

Unequal Impact of Conditional Conservatism on Components Accruals: Evidence from French Capital Market

Applied to the French context, this study examines the unequal impact of conditional conservatism on accrual components. The study’s sample is an unbalanced panel of 331 French companies listed on Euronext Paris during the period time going from 2000 till 2015. First, this work aims at attributing empirical evidence to conditional conservatism using Basu (1997) and Khan and Watts (2009) models to detect this accounting practice. Then, it analyses differential implications of conditional conservatism on accrual components.Actually, French companies are known to be conservative firms as they implement conditional conservatism through an accrual component of earning, two accruals drivers (Revenue and receivables) and the non-discretionary accrual. According to Richardson, Sloan, Soliman & Tuna (2005), the working capital component is the preferred tool, among accrual components, for the transmission of conditional conservatism.

On the Mystery of Financial Conservatism: Insights from Pakistan

ABSTRACTThis article empirically explores the prevalence and determinants of financial conservatism at Pakistani nonfinancial firms during the period 1998–2014. Along with several firm-specific variables as predictors of the most prominent theories, the effects of macroeconomic conditions and business group affiliation are also investigated. The results of the study show that approximately 14% of the firm-year observations are financially conservative. The ratio of financial conservatism almost doubled over that period, from 11.25% in 1999 to 20.76% in 2014. We find that financially conservative firms are more profitable, less risky, and pay higher dividends than their non-conservative counterparts. The results of the logistic regression reveal that the financial hierarchy and financial flexibility are the most powerful motives for avoiding debt financing. Finally, we show that macroeconomic conditions and business group affiliation also play a significant role in determining the likelihood of financial conservatism.

Progressive and Conservative Firms in Multistakeholder Initiatives: Tracing the Construction of Political CSR Identities Within theAccord on Fire and Building Safety in Bangladesh

The proliferation of multistakeholder initiatives (MSIs) over the past years has sparked an intense debate on the political role of corporations in the governance of global business conduct. To gain a better understanding of corporate political behavior in multistakeholder governance, this article investigates how firms construct a political identity when participating in MSIs. Based on an in-depth case study of the Accord on Fire and Building Safety in Bangladesh—an MSI established after the collapse of the Rana Plaza garment factory complex in 2013 to improve working conditions in the Bangladeshi garment industry—we introduce the construct of a political CSR (corporate social responsibility) identity (PCSRI) and explore how firms construct their PCSRIs in MSIs. Employing a qualitative, inductive theory-building method, we analyze interviews and archival data to develop a framework that elucidates how companies construct their PCSRIs within a continuum ranging from conservative to progressive. We show that constructing a PCSRI involves enacting specific, yet interrelated, political strategies that are themselves shaped by several forces over time. This article contributes to the literature by providing a political perspective on organizational identity construction that extends the emerging integrative perspective in political corporate social responsibility (PCSR) research. We suggest that MSIs should be conceptualized as inherently political governance mechanisms that are driven by multidirectional and dynamic political processes of identity construction. Our study shows that corporate political engagement in MSIs is a more nuanced and complex phenomenon than presently theorized.

The financial determinants of corporate cash holdings in an oil rich country: Evidence from Kingdom of Saudi Arabia

This paper investigates the determinants of the cash holdings for a sample of Saudi firms over the period 2006–2014, using static and dynamic panel models. Our results show that leverage, firm size, capital expenditure, net working capital and cash flow volatility are important in determining cash holdings. When we divide our sample into two sub-samples: petrochemical and non-petrochemical firms, our results show a significant difference between the determinants of cash holdings of the two groups of firms. We also investigate the characteristics of high liquid firms (conservative firms). The results indicate that conservative firms are less leveraged, have large size, have low investment expenditures and have low cash flow fluctuation. Furthermore, dynamic panel estimation indicates that Saudi firms adjust their liquidity holdings quickly towards an endogenous target cash ratio.

The predictive ability of investment property fair value adjustments under IFRS and the role of accounting conservatism

This paper examines the predictive ability (relevance) of fair value adjustments of Canadian investment property, for future cash flow outcomes. We hypothesize and find that the fair value adjustments of more conservative firms are more predictive of future cash flows. We also find that the market prices fair value adjustments of more conservative firms at a premium as compared to those of less conservative firms. Our empirical tests control for possible self-selection of sample firms into low and high accounting conservatism groups.

The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis

AbstractThis paper examines the effect of accounting conservatism on firm‐level investment during the 2007–2008 global financial crisis. Using a differences‐in‐differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more conservative financial reporting. This relationship was stronger for firms that were financially constrained, faced greater external financing needs, or had higher information asymmetry. We also find that more conservative firms experienced lower declines in both debt‐raising activity and stock performance. The evidence suggests that accounting conservatism reduces underinvestment in the presence of information frictions.

The usefulness of historical accounting reports

In this study we investigate the usefulness of historical accounting reports (10-Ks and 10-Qs) by examining four settings where we expect investors to acquire historical reports in order to obtain qualitative and quantitative information that contextualizes and conditions information released in the current period. Using a novel dataset that tracks user requests for accounting reports stored in the SEC EDGAR database, we find that requests for historic reports during the fiscal year are positively associated with financial reporting complexity and that requests around earnings announcements are positively associated with accounting discretion and negative earnings shocks (particularly for conservative firms). Finally, we find that daily requests for historical reports are positively associated with shocks to firm value (particularly negative shocks). Overall, our evidence suggests that historical reports make up an important component of the information mosaic assembled by investors.

Do Managers Use Voluntary Disclosure to Explain the Earnings Effects of Accounting Conservatism? The Role of Bundled Forecasts

By recognizing profits less timely than losses, conservatism can depress current earnings in favor of future earnings. This can cause investors to be inadequately informed about positive performance until future earnings are announced. To mitigate this information cost, we hypothesize that managers combine the mandatory announcement of current earnings with positive earnings guidance, thus providing investors with more timely information about positive performance. We consistently find that conservatism is associated with the bundling of positive earnings guidance with the announcement of current earnings. However, managers may not want to use this disclosure strategy because positive guidance is risky. We hypothesize and find that conservatism is more strongly associated with positive bundled guidance in situations where: a) managers’ personal incentives to please investors are higher; b) investors’ demand for guidance is stronger. In supplemental analyses, we investigate the relevance and reliability of the bundled forecasts released by conservative firms. We find that they are more accurate than those of less conservative firms and that they are associated with a significant response by investors and analysts. This paper contributes to the understanding of the determinants and characteristics of bundled forecasts, as well as the consequences of conservative reporting.

Explaining management accounting practices and strategy in Thailand

Purpose– The purpose of this paper is to report the level of adoption and benefit obtained from a range of management accounting practices (MAPs) in Thai organizations and analyze to these by reference to various strategic typologies.Design/methodology/approach– Contingency theory, proposing a fit between MAPs and a comprehensive set of strategic typologies is used. Factor analysis, cluster analysis, and Kruskal-Wallis one-way ANOVA is applied to analyze the data and test the hypotheses.Findings– It was observed that firms pursuing differentiation/prospector/entrepreneurial/build strategies significantly report higher benefit from contemporary MAPs. Firms with a cost leadership strategy were, as expected, found to obtain higher benefit from traditional MAPs. Contrary to expectations, entrepreneurial firms reported higher benefit from traditional MAPs than conservative firms.Research limitations/implications– Like all survey work this relies on questionnaire responses of individual organization members. A selection approach was adopted so no direct relationship with organization performance was investigated.Practical implications– Although use of the full range of MAPs is reported there is still reliance on traditional MAPs. Hence further exposure of businesses and practitioners to contemporary techniques is recommended in training, professional development, and interactions with international partners.Originality/value– The paper provides insight into MAPs in Thailand, an emerging economy and one with limited published academic research in management accounting. It incorporates four strategic typologies which previously have been mainly used individually in MA research.

Accounting conservatism and firm investment efficiency

We argue that conservatism improves investment efficiency. In particular, we predict that it resolves debt-equity conflicts, facilitating a firm׳s access to debt financing and limiting underinvestment. This permits the financing of prudent investments that otherwise might not be pursued. Our empirical results confirm these predictions. We find that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries. We also find that conservatism is associated with reduced overinvestment, even for opaque investments such as research and development.