Direct and indirect effects of unconditional conservatism on investment efficiency

Purpose This study aims to investigate the effects of unconditional conservatism on investment efficiency, focusing on both its direct and indirect effects. Design/methodology/approach We conduct multiple regression analyses on a sample of nonfinancial companies listed on the New York Stock Exchange from 2010 to 2018. Findings We provide evidence that conditional conservatism plays a central role in mediating the indirect effects of unconditional conservatism on investment efficiency. This is because a decrease in conditional conservatism, following an increase in unconditional conservatism, leads to reduced investment efficiency. Research limitations/implications This study offers valuable insights for the growing body of literature on the relationship between accounting conservatism and investment efficiency while emphasizing the critical role of conditional conservatism in mediating the relationship between unconditional conservatism and investment efficiency. Practical implications This study has several implications. Practitioners can make informed decisions regarding accounting policies, predict the potential effects of these choices and mitigate the negative impact of unconditional conservatism on investment efficiency. Investors can make more informed decisions by understanding how unconditional and conditional conservatism affect investment efficiency. Standard setters can guide user behavior toward more efficient investment decisions. Originality/value Considering the lack of comprehensive understanding in prior literature regarding the underlying mechanisms through which unconditional conservatism influences investment efficiency, this study investigates the direct and indirect effects characterizing this relationship. We provide evidence supporting a new explanation for the relationship between unconditional conservatism and investment efficiency.