Discussion of: "Acquisition profitability and timely loss recognition" by J. Francis and X. Martin

Francis and Martin (2009) test whether accounting conservatism induces managers to make better acquisition decisions. This discussion highlights three main issues. First, the hypothesized links between conservatism and future investments are potentially incomplete. In particular, the possibility that conservatism can have dysfunctional outcomes if acquisition decisions are based on anticipated earnings effects is ignored. Second, the evidence is insufficient to infer a causal relation between conservatism and acquisition profitability. Third, the hypothesis development fails to indicate whether timely loss recognition or the asymmetric timeliness of loss versus gain recognition is the more appropriate measure of conservatism given the context.