The Effect of Accounting Conservatism on Corporate Financing Activity: Evidence from Japan

• In Event: Accounting Issues in Japan

Abstract

This study examines how two types of conservatism―unconditional conservatism and conditional conservatism―affect Japanese firms’ financing activity, in particular, borrowing money from banks.　This study obtained the two main findings. First, firms practicing a higher level of unconditional conservatism borrow more money from banks under the condition of facing a funding shortfall. Second, the degree of their conditional conservatism does not significantly relate with the degree of proceeds from loans. These results are robust to the endogeneity problem between conservatism and firms’ borrowing activity. In addition, I find that firms having a strong relationship with the main bank benefit from unconditional conservatism and conditional conservatism is useful for firms having a weak relationship with the main bank. This paper reveals that the economic consequences of conservatism vary across institutional factors and suggests the possibility that the nature of conservatism has been misjudged by focusing only on the accounting system when considering its economic consequences.

Author

• SOUHEI ISHIDA, Hitotsubashi University