Essays on reporting conservatism

Abstract

This dissertation consists of three parts. The first part of the thesis, chapter two, reviews the papers on the definition, determinants, consequences, measures of reporting conservatism. This chapter is useful for chapters three and four, as it not only provides theories for building up the hypotheses that are tested in the later two chapters, but also comments on the models and measures that are employed in chapters three and four. Next, I investigate the impact of conservatism on investment efficiency. Using various measures to proxy for conservatism and investment efficiency and employing different models to examine the association between conservatism and investment efficiency, I find that the results are sensitive to different testing approaches. The empirical analyses provide no reliable evidence indicating that conservatism improves investment efficiency by deterring the over-investment problem. Endogeneity and measurement errors in the conservatism proxies are two possible reasons that explain the observed results. Finally, the last part of my thesis explores the influence of CEO retirement on conservatism. I first examine the link between CEO retirement and reporting conservatism and then further investigate CEO compensation's influence on it. I document that firms are more likely to prepare less conservative financial reports prior to the retirement of their CEOs, and further, the result is more pronounced for the CEOs that rely primarily on earnings-based compensation.