Real effects of auditor conservatism

• 成果类型: Article
• 署名作者: Chy, Mahfuz; Hope, Ole-Kristian
• 署名单位: University of Missouri System; University of Missouri Columbia; University of Toronto; BI Norwegian Business School
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-020-09568-3
• 发表日期: 2021
• 页码: 730-771
• 关键词: financial-reporting quality; earnings management; institutional investors; UNITED-STATES; trade-off; INNOVATION; INVESTMENT; liability; FIRMS; manipulation

摘要

We examine the effect of auditor conservatism on corporate innovation. We hypothesize that, because conservative auditors constrain income-increasing accounting discretion, managers may sacrifice long-term investments in innovation to boost current earnings and meet short-term performance targets. Exploiting state-level auditor legal liability shocks as a means of identification, we find evidence consistent with this hypothesis. Cross-sectional analyses reveal that the negative effect of increased auditor conservatism on corporate innovation is more pronounced when the client firms are under greater equity- and debt-market pressures, when the client firms are exposed to greater litigation risk, and when the client firms are audited by large auditors. Our study highlights how auditors, as external monitors, can affect not only the financial reporting quality of their clients but may also induce alterations in their real operations.