ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Conditional Conservatism and Investment Efficiency

  • Sangkwon CHA Department of Accounting, Graduate School, Hanyang University

Asian Tax Journal Vol. 22 No. 3 (2021), pp. 9-38

Abstract

This study examines whether conditional conservatism, which increases the timeliness of losses, improves the investment efficiency of companies. Specifically, Our research is to verify whether the investment level of over－invested companies is lowered to an appropriate level or the investment level of under－invested companies is raised. To this end, the verification period from 2011 to 2017, and data from 2009 to 2018 were used to empirically analyze KOSPI and KOSDAQ market. To measure conditional conservatism, we used the research method of Ball and Shivakumar(2005), which is a measure based on accounting information, and to measure investment efficiency, we used Tobin’s Q model and the analysis method suggested by McNichols and Stubben(2008). As a result of the analysis, conditional conservatism showed a significant negative (－) relationship with investment inefficiency. It can be interpreted that the higher the timeliness of losses, the better the investment level. In other words, conditional conservatism improves inefficient investment. When the inefficiency of investment is classified into over－investment and under－investment, conditional conservatism suppresses over－investment and promotes investment in the case of under－investment, which is considered to have a positive effect regardless of the type of investment inefficiency. This study is significant as a study that revealed that the utility of conditional conservatism can be manifested in the pursuit of private profits of managers and the suppression of investment inefficiencies of companies represented by the propensity to build an empire.

Keywords

  • Conditional Conservatism
  • Timeliness of Losses
  • Investment Efficiency
  • Over－investment
  • Under－investment

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Asian Tax Journal

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