Does Accounting Conservatism Mitigate the Operating Cash Flows Downside Risk?

Abstract

The aim of this study is to investigate whether the two types of accounting conservatism (conditional and unconditional) mitigate the risk of falling operating cash flows in the presence of cash holdings of Jordanian companies for the period from (2005–2014) for a sample of (160) companies listed in Amman Stock Exchange (ASE). By using the principle components analysis method in the SPSS system to generate a composite measure for the measurement of the conditional conservatism (CC_CM) consisting of three measures: negative accruals (CC_NACC), current accruals to total accruals (CC_CACC), and accounting conservatism to the good news (CC_ACGN). As well as to generate another composite measure for the measurement of the unconditional conservatism (UC_CM) consisting of three measures: total accrual (UC_TACC), book to market (UC_BTM) ratio, and skewness (UC_Skew). In order to measure the downside risk of operating cash flows, we used the root lower partial moment of operating cash flow (RLPM_OCF). We find that two types of accounting conservatism are significantly positively effect on cash holdings. In addition, we conclude that there is a significantly negatively indirect effect for accounting conservatism on downside risk of operating cash flows in Jordanian companies that have cash holdings. It means that the increasing of the accounting conservatism leads to the increasing of cash holdings, which leads to mitigate the operating cash flows downside risk.