• ISSN: 2155-7950
  • Journal of Business and Economics

Does Conservative Accounting Affect the Investment Behavior of a Company?

Shinya Hanamura
(Graduate School of Business, SBI University, Japan)

Abstract: This paper analyzed how conservatism accounting affects a company’s investment execution and management’s efforts. Conservative accounting discloses accounting information by biasing downwards information. Therefore, conservative accounting intuitively reduces the investment, and management is not likely to make an effort. However, the analysis of this paper, on the contrary, strengthening the degree of conservative accounting by combining it with compensation for management, thereby enables management to find more investment opportunities, to make more investment, to make more effort. As a result, it showed that corporate value will increase. Management has tendency to be hesitant to tighten accounting estimates when acquiring a company, and there is a claim that such tightening hinders promotion of acquisition. On the contrary, the argument of this paper presents the opposite result. If management do not raise the degree of conservatism accounting, excessive investment will be done, so management will carry out excessive investment with the risk of impairment in the future. However, by combining raising the management fee and raising the degree of conservatism accounting, it is possible to draw management’s efforts and maximize corporate value.

Key words: conservatism accounting; management compensation; investment behavior; incentive by shareholders

JEL codes: D80, C11, C62

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