Real asset liquidity and accounting conservatism: evidence from asset redeployability
ISSN: 0307-4358
Article publication date: 31 July 2024
Issue publication date: 23 October 2024
Abstract
Purpose
This study examines the implications of real asset liquidity for accounting conservatism. We investigate whether the liquidity of a firm’s physical assets mitigates lenders’ demand for conservatism by increasing the amount lenders can recover if the firm is liquidated, a theoretical prediction in Göx and Wagenhofer (2009).
Design/methodology/approach
We use an asset redeployability index as a proxy for firm-level real (physical) asset liquidity and adopt ordinary least squares (OLS) regressions in the test. We also investigate the differential impact of real asset liquidity on conservatism in two unique settings where lenders’ demand for accounting conservatism varies (loan initiation and bank deregulation).
Findings
We find that accounting conservatism decreases as real asset liquidity increases. The negative effect of real asset liquidity on conservatism increases as the quantity of the firm’s real assets increases, and the negative association is strengthened when firms face high financing constraints and have access to public debt markets. The moderating effect of real asset liquidity on lenders’ demand for conservatism increases (decreases) when real asset liquidity is more (less) important to lenders.
Originality/value
This study provides direct empirical evidence for the theoretical prediction in Göx and Wagenhofer (2009). Prior research shows that real asset liquidity impacts a firm’s capital structure and investment decisions (Campello and Giambona, 2013; Kim and Kung, 2017; Ortiz-Molina and Phillips, 2014; Williamson, 1988). We complement this literature by providing evidence that real asset liquidity also plays a role in financial reporting by reducing accounting conservatism.
Keywords
Acknowledgements
We gratefully acknowledge helpful comments and guidance from Don Johnson (editor), three anonymous referees, Dmitri Byzalov (discussant), Zhenhua Chen, Ted Fee, Theresa Hammond, Serena Loftus, Gans Narayanamoorthy, Rachel Peng, Paddy Sivadasan, and workshop participants at Tulane University, 2018 AAA/Deloitte/J. Michael Cook Doctoral Consortium, and 2021 AAA Annual Meeting. We thank Hyunseob Kim and Howard Kung for sharing the asset redeployability data and for many clarifications regarding the data. Wei acknowledges financial support from the Lam Family College of Business at San Francisco State University. Any errors are our own.
Citation
Huang, W. and Zhang, R.-Z.(R).Z.). (2024), "Real asset liquidity and accounting conservatism: evidence from asset redeployability", Managerial Finance, Vol. 50 No. 11, pp. 1895-1919. https://doi.org/10.1108/MF-10-2023-0633
Publisher
:Emerald Publishing Limited
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