Question

Do you think that the concept of conservatism has greater benefits for management or investors? Give examples.

Answer 1

The basic concept of conservatism attributes to both benefits and some disadvantages . I think that if accounting conservatism is utilized, the market value of the reported market assets would be more than their recorded book value and based on this definition, using costs in recognizing the investments will result in creation of the expectation of current positive net value of investments because it is expected that the analysts have estimated these investments less than their original value.

Also, firms' performance assessment is one of the most important issues considered by the investors in order to measure the amount of success of management in utilizing the capital and performance assessment is important to make decisions about maintaining, increasing, or selling stocks by the investors. So usually creditors assess the companys performance in order to make decisions about the amount and rate of credit rendering. Considering the strategic goals of a firm is necessary to select a set of appropriate performance assessment methods for a certain company. The most important aspect considered by the investors is whether their investment's value and performance result and management has increased or not? In other words, has a value been created for them or not.This way , the conservatism approach affects the management and also the investors decisions

Also , some studies shows that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries and also conservatism is associated with reduced overinvestment, even for opaque investments such as research and development.Conservatism mitigates under-investment as it facilitates access to debt financing.

It can be said  that conservatism improves investment efficiency. In particular, we can predict that it resolves debt-equity conflicts, facilitating a firm׳s access to debt financing and limiting underinvestment. This permits the financing of prudent investments that otherwise might not be pursued. So , generally conservatism facilitates financing projects that otherwise might not be pursued.also the effect of conservatism is more pronounced when information asymmetry is high.one of the main advantage of Conservatism is that it also reduces over-investment, even for low visibility investments.