3. Essay one
3.4 Empirical Results
3.4.3 Potential channels through accounting conservatism on corporate environmental
3.4.3.1 Access to short-term creditors
Previous literature has shown that accounting conservatism can reduce the cost of capital and thus make it easier for firms to obtain financing (Li, 2015; Zhang, 2008).
Because creditors take downside risk but have limited upside potential, they prefer conservative financial reporting that identify bad news in a timely way and reduce default risk (Li, 2015). Creditors often protect themselves with binding contracts based on a range of performance measures in regular financial reports (LaFond & Watts,
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2008). In the event of covenant violation, creditors could reduce their default risk by either taking over control of the firm or by exercising greater oversight (García Lara et al., 2011). By identifying bad news before good news, contracts based on earnings data become more binding (Ahmed et al., 2002). In exchange, creditors may demand lower returns from borrowers who commit to conservative financial reporting practices, which enable companies to acquire more credit (García Lara et al., 2011). Therefore, in order to obtain easily access to financing resources and reduce the cost of dependent resources, companies may choose to improve accounting conservatism. Although environmental performance has been shown to benefit capital providers in the long run (Hong & Kacperczyk, 2009; Cai, Cui, & Jo, 2016), but it may be disadvantageous for short-term creditors. On the one hand, the upside potential of companies is limited to the interests of debt creditors, especially the long-term benefits of environmental performance, which are difficult to benefit short-term creditors (Li, 2015). Jeucken &
Bouma (2017) point out that banks prefer short-term payback periods, while many investments necessary for achieving sustainability could be long term. On the other hand, Goss & Robert (2011)point out that environmental investment is divorced from the simple wealth maximization and its benefits are difficult to be measured.This will create the risk of over-investment, which will bring more costs to the company and potential risks to creditors. Therefore, considering the company's strategy of catering to short-term stakeholders, I believe that the company will choose accounting conservatism over environmental performance.
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Therefore, I adopt 2SLS approach to explore the intermediate role of pressure from short-term creditors on accounting conservatism and environmental performance.
Referring to Anagnostopoulou et al. (2021), I measure the access to short-term creditors of companies Debt/TA by the ratio of short-term debts to total assets. Short-term debt is chosen because long-term debt may depend more on collateral than accounting conservatism. In the first stage, I examine if Cscore is positively associated with Debt/TA. Table 1.3 Panel A reports the regression results of the first stage, which demonstrate a positive association between Cscore and Debt/TA. In the second step, I replace Cscore in the baseline regression with the fitted values of Debt/TA. In Panel B of Table 3, the coefficients of FV_Debt/TA is negatively and significantly associated with the environmental performance measures. Therefore, I conjecture that managers’
strategy on accessing to short-term creditors is one of the reasons for the negative association between accounting conservatism and environmental performance.
(Insert Table 1.3 here) 3.4.3.2 Analyst monitoring
Shareholders and creditors need conditional accounting conservatism to reduce information asymmetry and timely bring financial reports to protect their interests and reduce risks (Mora & Walker, 2015). Analysts' supervision plays a similar role in improving companies’ transparency and protecting investors' interests (Langberg &
Sivaramakrishnan, 2008). Analysts can reduce the fraud opportunity factor through external monitoring aimed at discouraging managerial misconduct, which can moderate
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agency problems (Chen, Cumming, & Hou, 2016). Therefore, I suspect that when the company has high-quality financial reporting, outside investors do not need additional analyst monitoring to ensure transparency and reduce information asymmetry. At the same time, less analyst supervision means that companies bear less pressure from external public opinion (Chen et al., 2016). In this case, managers don’t have to put additional effort on environmental performance to improve their reputation (Pan &
Zhao, 2021). Therefore, I conjecture that the attention of analysts is a channel for firms with high accounting conservatism to reduce their environmental performance.
I utilize a 2SLS approach to examine whether analyst monitoring is a channel through which accounting conservatism is negatively associated with environmental performance. Following Crawford, Roulstone, & So, (2012) and Piotroski & Roulstone (2004), I construct two variables to measure the degree to which analysts are concerned.
Analyst Attention is measured as the natural logarithm of the number of financial analysts that follow the firm, Report Attention is the natural logarithm of the number of research reports about a firm in a year. In the first stage, I examine if lower accounting conservatism is associated with higher analyst monitoring by regressing Analyst Attention and Report Attention separately on CScore and control variables specified in model (5). Results in Panel A of Table 1.4 indicate that accounting conservatism is negative associated with the analyst attention. In the second step, I replace Cscore in Table 1.4 with both the fitted values of Analyst Attention and Report Attention. In Panel B of Table 1.4, the coefficients of FV_Analyst Attention and FV_Report Attention are
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all positively and significantly associated with the environmental performance measures. The results are consistent with our conjecture.
(Insert Table 1.4 here)