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Managerial risk incentives and accounting conservatism

Author

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  • Chengru Hu

    (The State University of New York – Canton)

  • Wei Jiang

    (California State University – Fullerton)

Abstract

We provide empirical evidence of the effect of managerial risk incentives on financial reporting conservatism. We hypothesize that firms use greater accounting conservatism as a means of addressing increased firm risk arising from excessive managerial risk incentives provided by option compensation. Consistent with this hypothesis, we find a positive association between excessive managerial risk incentives and accounting conservatism measured as asymmetric timeliness of loss recognition. By contrast, we find no impact by normal (anticipated) risk-taking on accounting conservatism. Further analysis shows that the association between excessive managerial risk incentives and accounting conservatism is more pronounced when firms face more severe debtholder–shareholder conflicts. We also find that while cost of debt financing is positively associated with both anticipated and excessive risk incentives, the relationship with the latter is weakened by timelier loss recognition, suggesting firms with heightened risk incentives could economically benefit from using more conservative accounting.

Suggested Citation

  • Chengru Hu & Wei Jiang, 2019. "Managerial risk incentives and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 52(3), pages 781-813, April.
    • Handle: RePEc:kap:rqfnac:v:52:y:2019:i:3:d:10.1007_s11156-018-0726-5
    DOI: 10.1007/s11156-018-0726-5
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    More about this item

    Keywords

    Conditional accounting conservatism; Timely loss recognition; Risk-taking incentives; Executive compensation;
    All these keywords.

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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