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Conditional Conservatism and the Boundaries of the Firm: The
Case of Strategic Alliances
Shih‐Chu Chou Nir
Yehuda
Naveen Jindal School of Management The
University of Texas at Dallas 800 West
Campbell Road Richardson, Texas 75080
Very Preliminary
Do not quote without the authors’ permission
November 2014
Abstract
We examine whether conditional conservatism, and particularly timely loss recognition, is associated
with a firm’s investment amount in alliances as well as the investment form. We consider two types of
investment – equity stake in the partner and pledged cash. We find a strong and significant association
between timely loss recognition of the partner firm and the amount invested. Moreover, we find that the
partner’s level of conservatism is associated with a reduction in the amount of equity stake assumed in
the deal and positively associated with the amount of pledge cash granted. The relationship between the
amount invested, the form of investment and the partner’s conservatism is more pronounced when the
alliance is formed in a later stage of the product development, when equity financing is restricted and
when the partners did not have a previous contracting relationship.
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