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Evidence on the Benefits of Accounting Conservatism in Corporate Governance
Anwer S Ahmed, Texas A & M Univeristy
Scott Duellman, State University of New York at Binghamton
ABSTRACT. Using three different measures of conservatism we find that firms using conservative accounting (i) are less likely to take future special item charges, (ii) take special item charges for smaller amounts, and (iii) have higher future profitability as measured by return on assets, profit margin, and cash flows from operations. This evidence is consistent with conservative accounting helping directors in uncovering and terminating negative NPV projects on a timelier basis as predicted by Ball (2001) and Watts (2003). This evidence is also consistent with the existence of conservative accounting ex ante helping to prevent investments in negative NPV projects as predicted by Ball (2001) and Ball and Shivakumar (2005).
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