Managerial myopia and the unintended real consequences of conditional conservatism |
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Authors: | Byung Hun Chung Daniel W Collins Jane Z Song |
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Institution: | 1. College of Business, Nanyang Technological University, Singapore, Singapore;2. Henry B. Tippie College of Business, University of Iowa, Iowa City, IA, USA;3. Terry College of Business, University of Georgia, Athens, GA, USA |
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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. |
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Keywords: | capital market pressure conditional conservatism future returns managerial compensation myopia real earnings management |
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