A Comparative Field Study of the Impact of Conditional and Unconditional Accounting Conservatism on Firm Investment Efficiency and Shareholder Value Added: Application to listed firms in Egyptian Stock Market

The current study seeks to check the argument of IASB that the main objective of financial reporting is to enable decision making, that neutrality should be a qualitative characteristic of financial information, that conditional conservatism should be increased, and that unconditional conservatism that conflicts with neutrality should be eliminated. Specifically, this study evaluates the economic consequences of conservatism practices in Egypt, from the perspective of stock market investors, by analyzing the effects of the two types of accounting conservatism on investment efficiency of listed firms in Egyptian Stock Market, and shareholder value added. The researcher employs cross sectional data analysis and multiple regression using data available for a sample of the largest 30 Egyptian listed firms during the period of 2004 to 2014.The main results of the analysis are as follows. First, for firms with a high level of conditional conservatism, investments are curbed, and even when the firms do make investments, the investments of the firms, with a high level of conditional conservatism, have low levels of risk. Second, on the other hand, firms with a high level of unconditional conservatism make larger and riskier investments. This indicates that, in the presence of a risk averse manager, unconditional conservatism limits the earnings downside risk and increases both the risk-taking capacity of managers and the likelihood of investment in high-risk projects. However, the findings do not provide consistent evidence regarding the impact that such conservatism and its relationship with firm investment efficiency have on shareholder value added. Therefore, futures research of the relationship between conservatism and shareholder value will be necessary. The study contribution is that it clarifies the effects of conditional and unconditional conservatism on investment efficiency of listed firms in Egyptian Stock Market, and shareholder value added. That, this study raises awareness of the importance of the different economic consequences of these two types of accounting conservatism. The findings of this study are important for researchers exploring the desirable balance between conservatism and neutrality, and for the bodies that set accounting standards.