Review of Quantitative Finance and Accounting

, Volume 52, Issue 3, pp 781–813 | Cite as

Managerial risk incentives and accounting conservatism

  • Chengru HuEmail author
  • Wei Jiang
Original Research


We provide empirical evidence of the effect of managerial risk incentives on financial reporting conservatism. We hypothesize that firms use greater accounting conservatism as a means of addressing increased firm risk arising from excessive managerial risk incentives provided by option compensation. Consistent with this hypothesis, we find a positive association between excessive managerial risk incentives and accounting conservatism measured as asymmetric timeliness of loss recognition. By contrast, we find no impact by normal (anticipated) risk-taking on accounting conservatism. Further analysis shows that the association between excessive managerial risk incentives and accounting conservatism is more pronounced when firms face more severe debtholder–shareholder conflicts. We also find that while cost of debt financing is positively associated with both anticipated and excessive risk incentives, the relationship with the latter is weakened by timelier loss recognition, suggesting firms with heightened risk incentives could economically benefit from using more conservative accounting.


Conditional accounting conservatism Timely loss recognition Risk-taking incentives Executive compensation 

JEL Classification

M1 M41 J333 


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.The State University of New York – CantonCantonUSA
  2. 2.California State University – FullertonFullertonUSA

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