CEO Risk Aversion and Accounting Conservatism: Empirical Evidence

Abstract

Although managers have incentives to overstate the firms earnings, aggressive financial reporting entails diverse risks. Previous studies have focused on the relation between aggressive reporting and potential risks, including litigation risk, reputation risk and crash risk. And accounting conservatism, the fundamental feature of accounting information, plays an important role in mitigating these risks. Considering that, I examine how CEOs attitude towards risk influences accounting conservatism, both in terms of conditional and unconditional conservatism. Using a risk aversion parameter derived by Brenner (2015), I find that risk-averse CEOs are more likely to report earnings conservatively. These findings are attributed to risk-averse CEOs incentive to avoid potential risks caused by aggressive financial reporting. My results are robust to various conservatism measure and the inclusion of CEO overconfidence. Also, I find that risk aversion of CFOs, who engage deeply in accounting-, finance-related decision-making, doesnt affect accounting conservatism. This results may be because CEOs have a wider scope of authority and tend to be the final decision maker.