CEOs, in particular founder-CEOs, are often visionaries with strong beliefs about the right strategic direction for their firms. For example, Apple CEO and founder Steve Jobs was known to be obsessed with product quality and design. The strategy to produce the highest quality products was deeply ingrained in the company and part of Jobs’ vision. Apple’s board of directors was likely less obsessed or convinced than Jobs and hence more willing to revise the organization’s strategy in response to new information. How should a board of directors that does not necessarily share the visionary CEO’s strong convictions advise and monitor … Read more
Academics and practitioners, including lawyers, emphasize the importance of conservative accounting to lenders and corporate boards, allowing them to intervene and take corrective actions at an early stage. However, conservative accounting may also increase the risk of false alarms and prompt excessive interventions. In light of this downside, the overwhelming and in many cases unconditional support that conservative accounting often receives is puzzling.
We aim to reconcile the support for conservatism with the concern for false alarms by showing that managers’ ability to gather additional evidence following accounting reports changes the balance between the benefits and costs of conservative accounting. … Read more