The implications of financial conservatism for African firms

Using a large sample of African firms over the period 1982—2015, we find that firms forced into financial conservatism due to financial constraints have lower stock market valuation and profitability relative to their unconstrained counterparts who choose conservatism (optional financial conservatism) for motives linked to financial flexibility. Our further analyses, however, show a decrease in investments and employment with financial conservatism in the long-run. This finding highlights a significant trade-off with the desire to attain or enhance financial flexibility. Overall, our study confirms the benefits of optional financial conservatism and detriments of forced financial conservatism in developing markets where access to finance is limited.