Conservatism and the Boundaries of the Firm

• In Event: Real effects of conservative reporting
  In Paper Session: Real Effects of Cnservative Reporting

Abstract

We examine whether the partner’s conditional conservatism, and particularly timely loss recognition, is associated with a firm’s investment amount in alliances as well as the investment form. We consider two types of investment – equity stake in the partner and pledged cash. We find a strong and significant association between timely loss recognition of the partner firm and the amount invested. Moreover, we find that the partner’s level of conservatism is associated with a reduction in the amount of equity stake assumed in the deal and positively associated with the amount of pledged cash granted. The relationship between the amount invested, the form of investment and the partner’s conservatism is more pronounced when the alliance is formed in a later stage of the product development, when equity financing is restricted and when the partners did not have a previous contracting relationship.

Authors

• Shih-Chu Chou, The University of Texas at Dallas

• Nir Yehuda, The University of Texas at Dallas