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Determinants of financial conservatism in the United Kingdom and France.
Pages 46 (11546 words)
This document investigates the characteristics of firms that adopt financial conservatism as a policy in their financial practices. The role of corporate governance procedures has been specifically targeted to describe the concept, characteristics and different approaches to financial conservatism. …
In the first section, which serves as a background and motivation for this investigation; the empirical studies into financial conservatism and debate on its existing measures in a summarized form has been laid out. In this chapter, a detailed literature review is presented, which elaborates on the various schools of thought regarding conservatism. The next section describes about financial distress. The co-relation between financial distress and financial conservatism is discussed. The analysis has been carried out on financial models of Ericson (as an example from the literature), Alcatel-Lucent and England and Wales Cricket Board (their financial report) as case studies and the results have been discussed to establish that the financial conservatism has its standing and strengths in corporate governance to the modern corporate world. In addition, a comparison of the term Financial Distress with the Accounting Conservatism from the literature concludes that financially conservative firms do not depend on financial distress. To carry out this comparison, a sample of small firms that defaulted on their bank debt in UK and France is taken and analyzed. The last part is devoted to the conclusion of our analysis efforts. From this study, we conclude that financial conservatism is very independent of financial distress and provides more flexibility to the firms. We find that there are several reasons to use accounting conservatism in corporate governance and that current empirical evidence indicates that conservatism has increased in the last decades. ...
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