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The aim of this paper is to investigate if and how conditional conservatism influences capital management practices in the context of European listed banks.

We use multiple fixed effects regression models with robust standard errors to test the research hypotheses on a sample of 2,883 bank-year observations for EU-listed banks from 2010 to 2020.

The study provides evidence that the adoption of conditional conservatism policies constrains upward capital management. In addition, this study shows that such influence is mediated by two channels: earnings management and loan portfolio quality. Regarding the first channel, this study shows that the adoption of conditional conservatism hinders upward earning management which, in turn, negatively impacts upward capital management, all else being equal. For the second channel, this study shows that the adoption of conditional conservatism improves the quality of the loan portfolio, which hinders upward capital management because of less risky assets in the portfolio.

This study contributes to banking literature by shedding light on the factors that may favor or obstruct capital management.

This study can be useful for bank regulators and standard setters to define new regulatory policies and standards that can hinder the use of manipulative accounting practices.

This is the first study exploring the association between bank accounting conservatism and capital management, thus asking whether some factors like earnings management and loan portfolio quality may act as mediating channels in this relationship.

This study aims to investigate the effects of unconditional conservatism on investment efficiency, focusing on both its direct and indirect effects.

We conduct multiple regression analyses on a sample of nonfinancial companies listed on the New York Stock Exchange from 2010 to 2018.

We provide evidence that conditional conservatism plays a central role in mediating the indirect effects of unconditional conservatism on investment efficiency. This is because a decrease in conditional conservatism, following an increase in unconditional conservatism, leads to reduced investment efficiency.

This study offers valuable insights for the growing body of literature on the relationship between accounting conservatism and investment efficiency while emphasizing the critical role of conditional conservatism in mediating the relationship between unconditional conservatism and investment efficiency.

This study has several implications. Practitioners can make informed decisions regarding accounting policies, predict the potential effects of these choices and mitigate the negative impact of unconditional conservatism on investment efficiency. Investors can make more informed decisions by understanding how unconditional and conditional conservatism affect investment efficiency. Standard setters can guide user behavior toward more efficient investment decisions.

Considering the lack of comprehensive understanding in prior literature regarding the underlying mechanisms through which unconditional conservatism influences investment efficiency, this study investigates the direct and indirect effects characterizing this relationship. We provide evidence supporting a new explanation for the relationship between unconditional conservatism and investment efficiency.