Conditional Conservatism in U.S. High- and Low- Technology Firms

Abstract

In this study, we investigate whether U.S. high-technology firms are more or less conditionally conservative relative to low-technology firms. If U.S. high-tech firms are required to expense immediately all R&D costs according to the accounting standard SFAS 2, which reflects unconditional conservatism, then in case of bad news (conditional conservatism), these firms cannot write-off their R&D costs. We expect that high-tech firms are less conditionally conservative since unconditional conservatism dampens the timeliness of accounting income. Our findings are consistent with the prediction that high-technology firms are less conditionally conservative than low-technology firms. The level of conditional conservatism increases with the level of leverage regardless of the technology level of the firm. Only low-technology firms are more conditionally conservative when they face higher auditor litigation risk. We find that neither in high-technology firms nor in low-technology firms, taxation affects conditional conservatism.