Advances in Management and Applied Economics

Influence of Investment Efficiency by Managers and Accounting Conservatism on Idiosyncratic Risks to Investors

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• Abstract

   

  This paper examines whether the investment efficiency of managers and accounting conservatism affect the idiosyncratic risks to investors. The empirical findings suggest the following. Firstly, overinvestment (underinvestment) by managers increases (decreases) idiosyncratic risks to investors. Secondly, accounting conservatism enhances information quality and lowers the idiosyncratic risks. Finally, accounting conservatism mitigates the investment inefficiency by manager and affects the idiosyncratic risks to investors, meaning it mitigates manager’s overinvestment and lowers the idiosyncratic risks to investors. In the case of underinvestment, accounting conservatism improves manager’s motivation for investment, and thus, the idiosyncratic risks to investors.

   

  JEL classification numbers: G32, M41, D81

  Keywords: Idiosyncratic risk, Investment efficiency, Over-investment, Under-investment, Accounting conservatism.