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The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis

This paper examines the effect of accounting conservatism on firm-level investment during the 2007–2008 global financial crisis. Using a differences-in-differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more conservative financial reporting. This relationship was stronger for firms that were financially constrained, faced greater external financing needs, or had higher information asymmetry. We also find that more conservative firms experienced lower declines in both debt-raising activity and stock performance. The evidence suggests that accounting conservatism reduces underinvestment in the presence of information frictions.