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Real effects of auditor conservatism

Chy, Mahfuz; Hope, Ole-Kristian
Peer reviewed, Journal article
Accepted version
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URI
https://hdl.handle.net/11250/3001554
Date
2021
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  • Scientific articles [1771]
Original version
Review of accounting studies. 2021, (26), 730-771.   10.1007/s11142-020-09568-3
Abstract
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.
Publisher
Springer
Journal
Review of accounting studies
Copyright
Springer

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