Role Of Conservatism Research Articles

Impact of Accounting Conservatism on Income Smoothing: Empirical Evidence from Algeria

Abstract This paper investigates the impact of accounting conservatism on income smoothing as a proxy for accounting manipulation. The study used 993 observations for 133 Algerian companies from 2012 to 2020, where income smoothing was measured by the variations in cash flows relative to earnings. However, conservatism was measured through non-operating accounting accruals, accruals-to-earnings ratio before extraordinary items, and allowances. The results showed that total accruals do not impact income smoothing versus positive impacts from non-operating accruals and allowances to income smoothing. Therefore, the study concluded that accounting conservatism facilitates income smoothing in Algerian companies by extending the discretionary room available for managers to manipulate earnings. These results require accounting regulators to consider the role of conservatism in manipulation when setting or amending accounting standards. They also imply that auditors should give more attention to conservative accounting practices to limit the opportunistic behavior of managers and increase the reliability of financial information.

Could Conservatism Reduces Earning Management Practice in IPO During the Current Covid-19 Pandemic?

The research examines the market reaction to the information prepared by two different accounting standards during the covid-19 pandemic, and the role of Conservatism in reducing the earning management practice in the initial public offerings (IPO). The response considers the rationality level, the avoidance risk, and accounting standards' role in preparing the information. An event study of IPO is conducted on the various primary market in the U.S., Europe, and Asia. Our conclusions are twofold. First, the market reacts quickly to the stated information, where the accounting standards influence the reaction level. Second, during the covid-19 pandemic, earnings management plays a role in increasing the market reaction intensity. At the same time, we have not found conservatism's role in reducing the earning management activity.

Assets and Liabilities: When Do They Exist?

ABSTRACTIn this paper, we investigate whether the current references to probability in standard setters' conceptual definitions of assets and liabilities cause individuals to believe that the probability of a future transfer of economic benefits must be above some meaningful threshold for an asset or a liability to exist—a belief that is contrary to standard setters' intent. Results of multiple experiments indicate that the majority of individuals do use a high probability threshold to determine asset existence, whereas for liabilities the majority use a very low threshold. Thus, even under ceteris paribus conditions, liabilities are more frequently judged to exist than assets—a phenomenon analogous to accounting conservatism, as has been discussed in terms of the performance statement. These findings are robust to variation in formal training and in type of liability, and cannot be explained by alternative approaches to judging existence. Consistent with standard setters' intentions, results also suggest that their proposed changes to the definitions of assets and liabilities—changes that attempt to clarify the intended role of probability—do cause a greater proportion of participants to indicate that the relevant financial statement element (asset or liability) exists, relative to participants with no definition. Our study provides important insights for standard setters as they continue work on their missions to update their Conceptual Frameworks and for researchers regarding the role of conservatism on the balance sheet.

The Stewardship Role of Conservatism

The Stewardship Role of Conservatism

Factors Impacting upon Attitudes Toward Sex Offenders: The Role of Conservatism and Knowledge

Sex offender legislation is influenced by public pressure. However, there is evidence suggesting that the public's beliefs about sex offenders may be based upon myths and misperceptions. This study examined the relationship between knowledge of sex offenders in areas concerning their recidivism rates, treatment outcomes, and victim types, as well as current supervision and correctional management directed toward sex offenders and how this knowledge relates to overall attitudes towards sex offenders, sex offender treatment, and community notification laws. Further, we sought to examine how conservative belief systems affect this relationship. Using a sample of 559 undergraduate students we found that knowledge about sex offenders and conservative beliefs were significantly related to attitudes toward sex offenders such that those who had more conservative beliefs and less knowledge were more likely to have negative views toward sex offenders. Additionally, conservative belief systems moderated the relationship between knowledge about sex offenders and general attitudes toward sex offenders. These findings will be discussed as they pertain to the development of evidence-based sex offender policies.

New development: The protective role of conservatism in public sector accounting

This article picks up a discussion in international business accounting about the appropriate definition and use of conservatism (or prudence) and calls for a similar discussion in public sector accounting. If financial reports present an overly optimistic situation, politicians might use them to justify spending public money that is not there, risking the sustainability of services and ‘borrowing’ from future generations.

Litigation risk, information asymmetry and conditional conservatism

This study examines whether a change in litigiousness explains variations in the relationship between information asymmetry and conditional conservatism. Prior literature documents a positive association between information asymmetry and conservatism. Prior literature also demonstrates that shareholder litigation concerns motivate managers and auditors to be conservative in preparing financial statements. In a more litigious environment, both managers and auditors have incentives to be more sensitive to expected litigation costs which increase with the level of information asymmetry. We hypothesize and find that higher levels of litigiousness enhance the association between information asymmetry and conservatism. This topic is important given the role of conservatism in accounting practice and the recent tendency for standard setters to view conservatism in a negative light. Prior research argues that conservatism is a favorable characteristic in equity markets because of its information role. This study attempts to gain a further understanding of what affects that role.

The Relation between Accounting Conservatism and Corporate Social Performance: An Empirical Investigation

AbstractAccounting conservatism and corporate social responsibility have received much attention in the recent literature. The current study draws upon Watts, who recognizes that one role of conservatism is to reduce the likelihood of excess wealth transfers to its stakeholder groups and Post et al., who assert that a key aspect of positive corporate social performance is the (equitable) distribution of corporate wealth. Accordingly, this study empirically investigates and finds a positive relation between conservatism and strong social performance.

Accounting conservatism, environmental uncertainty and the capital structure

The purpose of this paper is to examine the effect of reporting conservatism on firm’s capital structure decisions and the role of environmental uncertainty as a moderating variable. While the role of conservatism has been investigated in certain debt-contracting setting, evidence is sparse about the effect of conservatism on the degree of financial leverage. We examine this issue using a sample of Australian firms from 1992 to 2005. We find that accounting conservatism positively affect a firm’s leverage structure. Further, we find that the relation between accounting conservatism and firm leverage is moderated by environmental uncertainty context; however this finding is not robust to all three proxies that we used to measure conservatism.

Does accounting conservatism affect firm investment efficiency in an emerging market? Evidence from Tunisian context

Accounting conservatism is one of the most pervasive characteristics of financial reporting and one of the most influential accounting principles. At the same time, the efficiency of investment is a key to the existence and development of a firm. Therefore, how the conservative accounting policy influences the efficiency of a firm’s investment deserves deep research. Prior studies have shown that accounting conservatism acts as a governance mechanism that increase capital allocation efficiency by facilitating the monitoring of managers’ investment decisions and improving a firm’s information environment and its access to external financing at lower cost, thereby prevents firms’ overinvestment and underinvestment. These studies use predominantly US data. Thus, it is worth to question if the results can be extended to an emerging economy. Focusing on the case of Tunisia, we argue that particularities of governance system of an emerging economy, could constrain the monitoring and the informational roles of conservatism. Consisting with our prediction, we find that conservatism has no significant effect on firms’ investment efficiency in Tunisian market.

Shareholder Litigation and the Information Role of Conservatism

Shareholder Litigation and the Information Role of Conservatism

Shareholder Litigation and the Information Role of Conservatism*

Shareholder Litigation and the Information Role of Conservatism*