Effects of Accounting Conservatism on Investment Efficiency and Innovation (Summary)

CFA Institute Journal Review summarizes "Effects of Accounting Conservatism on Investment Efficiency and Innovation," by Volker Laux and Korok Ray, from the Journal of Accounting and Economics, August 2020.

Overview

Managers decide whether to invest in innovative projects based on financial reporting and incentives. By implementing more-stringent verification standards for recognizing good news, conservative reporting practices may lower the probability that risky innovations will receive positive future earnings reports if they are not offset by appropriate incentive contracting.

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