Accounting conservatism and corporate cash levels: empirical evidence from Latin America

Aviner Augusto Silva Manoel, Marcelo Botelho da Costa Moraes

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)


Research Question/Issues: The aim of this research is to shed light on the role accounting conservatism plays in the determination of firms' cash levels. Previous literature suggests that conservatism is a governance mechanism that can alleviate agency problems associated with managers' investment decisions. Hence, we hypothesize that strong conservatism limits managers' ability to expend cash to benefit themselves. For that, we used an unbalanced panel data of firms from Latin America (Argentina, Brazil, Chile, Mexico, and Peru) with data available from 2000 to 2018. Research Findings/Insights: Our results are, for the most part, consistent with our theoretical predictions. Indeed, we find strong and robust evidence that Latin American firms with more conservative accounting policies have higher cash holdings as a result of a reduction in cash misappropriation. These results are robust to alternative measures of conservatism, after controlling for other factors associated with timely loss recognition, for country fixed effects and after a battery of robustness checks. Theoretical/Academic Implications: Our analyses suggest that increased conservatism has the potential to bring real economic benefits to organizations, serving as an efficient mechanism that reduces agency costs regarding cash management by inducing a more efficient use of cash holdings. Therefore, we contribute to the international literature on conservatism, cash holdings, and corporate governance by demonstrating the importance of conservatism in firms' decisions on how cash is employed. These findings are particularly interesting because cash expropriation can have a devastating impact on shareholder wealth. Practitioner/Policy Implications: Given the ongoing debate about whether neutrality, as opposed to conservatism, is a desirable feature in financial reports, by documenting how conservatism reduces agency problems related to cash management, we also provide practical implications for accounting standard-setters.
Original languageEnglish
Pages (from-to)335-353
Number of pages19
JournalCorporate Governance: An International Review
Issue number3
Publication statusPublished - May 2022
Externally publishedYes


  • Corporate governance
  • Cash holdings
  • Timely loss recognition


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