An Empirical Study of the Relationship between Investment-Cash Flow Sensitivity and Accounting Conservatism (Efficient Contracting View or Distortion of Information Systems View?)

This study examined whether reporting conservatism is related to firms'' financial flexibility as manifested in their corporate financial decisions، namely their investment–cash flow sensitivity. In other words، the relationship between investment-cash flow sensitivity and accounting conservatism has investigated and the effect of some control variables on this relationship has examined. This study is done in Tehran Stock Exchange listed companies over the period 2004 to 2011 by using panel data method in multivariate regression models. The results showed that there was significant and negative relationship between investment–cash flow sensitivity and accounting conservatism. This finding supported the Efficient Contracting View. It means that firms with greater reporting conservatism should experience lower investment-cash flow sensitivity.