S&P 500 Membership and Accounting Conservatism

• In Event: Financial Accounting and Reporting III

Abstract

In this study we examine the association between S&P 500 membership and conditional conservatism (“conservatism”). Conservatism is often considered a mechanism for reducing agency costs for owners and has been positively associated with litigation risk (Chung and Wynn 2008) and agency problems (LaFond and Roychowdhury 2008; LaFond and Watts 2008). In addition, conservatism is associated with lower borrowing costs (Zhang 2008) and lower cost of equity (Garcia et al. 2011). Presumably the firm’s choice in conservatism is one component of an overall efficient contracting environment between managers and owners as well as the firm and lenders. However, it is possible that S&P 500 membership alters the efficient level of conservatism as such membership may alter agency issues for the firm and its external stakeholders. We examine conservatism among a sample of firms that change membership in the S&P 500 from 2001-2011 and find a negative association between S&P 500 membership and conservatism. These results suggest that S&P 500 membership may partially substitute for the contracting benefits inherent in conservatism that previously protected investors from manager opportunism and thus alters the efficient level of conservatism.

Authors

• Matthew M. Wieland, Indiana University, Indianapolis

• Gregory Martin, Indiana University, Indianapolis

• Wayne B. Thomas, University of Oklahoma