Unconditional Accounting Conservatism Research Articles

Does Unconditional Accounting Conservatism Imply Upside or Downside Risk? Evidence from the Options Market

SYNOPSIS Conservatism captures an asymmetric reporting practice in response to uncertainty in business operations (earnings). Such uncertainty in business operations implies that investors are exposed to tail risk such that there is a probability of large earnings growth, offset by the probability of a large earnings decline. Existing literature has shown that accounting conservatism relates positively to stock returns. However, the literature is silent on whether this pricing is driven by positive earnings expectation or by the potential negative earnings growth. Using option-implied assets, we find that conservatism is priced by investors’ risk aversion (downside risk) rather than the potential upside. Several robustness tests confirm the findings. We also provide evidence that the returns are not driven by mispricing but as compensation for the risk implied by conservative reporting. We further decompose an alternate conservatism measure and find that our results are driven by the uncertainty in expenses rather than revenues.

Modeling the Impact of Accounting Conservatism on Information Behaviour in Equity Valuation Based on PLS-SEM

Based on residual income valuation models, this study used PLS-SEM with a formative approach to investigate the moderating effects of conservative policies on the relation between accounting information of the current and lagged periods with the equity value of companies listed on the Tehran Stock Exchange. The sample consisted of 149 companies from 2012 to 2019. The moderating effect of conditional / unconditional accounting conservatism on the relation between current/lagged accounting information and equity value is insignificant at the 10% level. In contrast, conditional conservatism has a significant relation with current/lagged accounting information, current/lagged market information, and equity values. Unconditional conservatism has significant relation with current/lagged accounting information, lagged market information, and equity values. Unconditional conservatism, however, has no significant relation with the current market information. Referring to Ohlson's vision (1995) on the expected long-term convergence between book value and market equity value, this paper's findings show that the current/lagged book value constitutes the structure of linear dynamics used in the residual income valuation model; therefore, the dynamics in residual income evolve on the dynamics of book value and market equity value.

The Effect of Managerial Adverse Experience on Financial Reporting

ABSTRACT We identify executives who have experienced significant accounting-related adverse events during their careers as a powerful setting to examine the extent to which prior professional experience can influence subsequent financial reporting policies. We find that firms led by senior financial executives who have experienced accounting-related adverse events during their careers exhibit greater unconditional accounting conservatism, a lower likelihood of experiencing future accounting-related adverse events, and less positive abnormal discretionary accruals. This effect tends to be stronger when the experience is more frequent, recent, severe, or proximate. Overall, our results reveal a meaningful relationship between managers’ professional experience and accounting policies. Data Availability: All data used in this study are obtained from publicly available sources. JEL Classifications: G40; M40; M41.

The impact of accounting conservatism on financial stability: an empirical study on a sample of Iraqi banks

The aim of the research is to know the effect of accounting conservatism (AC) on the financial stability of a sample of (10) Iraqi banks for the period from 2010 to 2019, as unconditional accounting conservatism was measured according to the study (Givoly & Hayn, 2000) and (Cho, 2016), While financial stability was measured using the (Zscore) model. The research concluded that there is an effect of accounting conservatism, especially unconditional conservatism, in the financial stability of the research sample banks.

Principles-based standards and conditional accounting conservatism

While the regulatory push towards principles-based standards in the United States and elsewhere is based on the notion that principles-based standards are more informative to capital market participants relative to rules-based standards, we do not know how principles-based standards impact accounting conservatism for U.S. firms. Using a measure of a firm's reliance on principles-based versus rules-based standards, we contribute to the literature by empirically examining the relation between conditional accounting conservatism and use of principles-based standards for U.S. firms. We find that conditional accounting conservatism is lower for firms relying more on principles-based standards, and this association is more pronounced for firms with greater earnings management incentives. However, the negative relation between conditional conservatism and use of principles-based standards is mitigated when there are contracting or litigation concerns. Additional analysis shows that reliance on principles-based standards also reduces unconditional accounting conservatism. Our findings are robust to using alternative measures of accounting conservatism, firm fixed effects, and a difference-in-difference model. Our evidence informs the FASB and the SEC that adoption of principles-based standards comes at a cost and has implications for regulators, auditors, analysts, investors, and others.

Busy boards and accounting conservatism – an Australian perspective

PurposeThis paper aims to examine the association between busy directors on corporate boards and accounting conservatism.Design/methodology/approachThe authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues.FindingsThe presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings.Practical implicationsThis paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties.Originality/valueThis research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.

Differences in government accounting conservatism across jurisdictions, their determinants, and consequences: the case of Canada and the United States

We use the year-end adjustments to the provisions for student loan losses of state and provincial governments in the United States and Canada to study government accounting conservatism and how it varies between these adjacent and highly integrated countries. Building on Canada’s more conservative cultural attributes, we hypothesize and find that Canadian provincial governments report more conservative provisions for student loan losses than U.S. state governments. Moreover, the year-end adjustments to the provisions in Canada are excessively conservative; they are larger than the audit materiality threshold. We further find that the political ideology of the government, government reporting incentives, government debt, and political competition are important determinants of government accounting conservatism. Finally, we find a negative association between the year-end adjustment to the provision and future student lending. This result suggests that government accounting conservatism leads to credit rationing and significant societal consequences for students. Overall, our study highlights important aspects of the determinants and consequences of government accounting conservatism. To the best of our knowledge, this study is the first to examine government unconditional accounting conservatism.

The effect of unconditional conservatism on the effectiveness of investment policies through overconfidence in the French context

In this paper, we first present a practical analysis of the reciprocal relationship between unconditional accounting conservatism and managerial overconfidence. Second, we examine the accounting conservatism effect on the investment policy effectiveness in the French context. The analysis sample includes non-financial companies listed on SBF 250 market with the period 2009-2017. We determine, through this analysis, whether accounting conservatism mitigates the optimism of over-confident managers, knowing that they generally tend to overestimate future returns on investments, exercise less prudent accounting practices and over-invest in capital projects. Basically, this research aims to verify the type of moderating effect that accounting conservatism provides for investment policy effectiveness, and the reduction of related behavioural bias generated by overconfidence. Empirical results allow elucidating this relationship and removing the ambiguity of the accounting conservatism role on over-investment processes. The conclusions partly opposed to those established in the literature on other analytical samples.

IFRS adoption and unconditional conservatism: an accrual-based analysis

PurposeIn this paper we analyse the effect on unconditional conservatism of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European listed firms in January 2005. Under the hypothesis that accounting regulation influences the accounting conservatism, we use a non-market-based measure of unconditional conservatism – the accrual-based measure proposed by Givoly and Hayn (2000) – to test this effect, controlling for the other determinants of the unconditional conservatism found in the accounting literature.Design/methodology/approachWe use a panel data of 10 years and 96 non-financial listed firms in the Spanish stock market in which the differences between local GAAP and IFRS are more important. A pre-estimation analysis of the data reveals that GLS with random effects is the correct estimation procedure. However, to try to deal with the likely endogeneity in the set of variables, the authors perform an estimate with a dynamic estimator for panels with few periods and many individuals where the independent variables are not strictly exogenous.FindingsAs expected, results show evidence that support a significant reduction on the unconditional conservatism of firms in the sample due to the adoption of IFRS. This evidence is relevant to equity market, debt market and corporate governance users of the financial information, and also for the policymakers who can assess the effects of their mandate.Research limitations/implicationsResults shown in this paper have all the limitations of system-, country-, sample- and event-specific studies but, along with many others drawn in alternative contexts, may help to correctly understand both the time-evolution and cross-sectional country differences of firms’ unconditional conservatism.Originality/valueThe study represents the first analysis of the effect of the adoption of IFRS on unconditional conservatism of the European listed companies using a non-market accrual-based measure. Results are not influenced by the dynamics of the stock market and, by comparison, allow us to analyse this influence in results provided by using market-based measures of the unconditional accounting conservatism provided by previous literature.

تأثير الخصائص الديموغرافية لأعضاء مجلس الإدارة في التحفظ غير المشروط: دراسة على عينة من الشركات المدرجة في سوق العراق للأوراق المالية

This study examines the relationship between the demographic characteristics of the Board directors (gender, nationality, education, and age) and the unconditional accounting conservatism in Iraqi companies. The sample consisted of 10 Iraqi banks listed in the Iraq market over the period from 2012-2017. The research was based on the main hypothesis that demographic characteristics positively influence unconditional conservatism. The results of the study show that the gender (percentage of females in the board) and the age of the members of the board of directors are positively related to the accounting conservatism, which indicates that the appointment of women to the board helps to provide conservative accounting information and avoid exaggeration in measuring profits. While there is no relationship between nationalism and education with the unconditional accounting conservatism. Based on the experimental results and based on the benefits provided by the conservatism, the study recommends the competent authorities to develop legislation requiring companies listed on the Iraq Stock Exchange to allocate a percentage for female representation in the board of directors, the study also recommends companies electing board members from among the elderly because they are inclined towards conservative reporting.

Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts' Target Prices

ABSTRACTWe examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross‐sectional analysis suggests that more sophisticated analysts and superior long‐term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts' earnings forecasts are negatively associated with the degree of conservatism; that is, analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings‐based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.

ACCOUNTING CONSERVATISM AND FINANCIAL PERFORMANCE OF NIGERIAN DEPOSIT MONEY BANKS: AN ANALYSIS OF RECENT ECONOMIC RECESSION

This study explores the relationship between Accounting conservatism and Bank performance in Nigeria. The study uses ex-post facto research design in a sample of 10 Nigerian deposit money banks (NDMBs). Secondary data for a period of 5 years (2012-2016) was used. The study model examined the relationship between the independent variables (Accounting conservatism) and the dependent variable (Bank performance), by applying the Advance panel Multiple regression analysis (Panel Corrected Standard Error).The results obtained from this research indicate that there is a significant relationship between accounting conservatism and Bank performance in Nigeria. From the result conditional accounting conservatism (C-ACC) has a positive relationship with Bank performance (ROA) while unconditional accounting conservatism (UC-ACC) is negatively related to Bank performance (ROA). The study concluded that there is a significant relationship between accounting conservatism and bank performance in Nigeria. The study suggest that Managers of NDMBs should use conditional conservatism as a means to manage information asymmetry in their financial reporting strategies. Also it is recommended that accounting standard setters and bank regulators should consider the effects of unconditional accounting conservatism on banks performance when designing rules and regulations for banks.

Valuation Implications of Accounting Conservatism

This paper examines whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism has a downward effect on reported earnings, it does not have a downward effect on the present value of future cash flows. We examine whether analysts add back the effect of accounting conservatism incorporated in their own earnings forecasts when using these forecasts to estimate target prices. We find that signed target price forecast errors (actual minus forecast) have a significant positive association with the degree of conservatism in earnings, suggesting that on average target prices are biased due to the effect of accounting conservatism. Cross-sectional analysis suggests that more sophisticated analysts undo the effect of conservatism to a greater extent than other analysts, although their target price forecasts also exhibit systematic bias due to conservatism. In additional analyses, we track the analyst's valuation path to understand the mechanism through which unconditional conservatism leads to bias in target prices. We first establish that analysts' earnings forecasts do incorporate the downward effect of accounting conservatism. Based on alternative earnings-based valuation models/heuristics that analysts may use, e.g., the forward P/E and the PEG ratio, we find that analysts fail to add back the effect of accounting conservatism incorporated in their earnings forecasts when deriving their target prices. As a consequence, we find that, for extreme levels of conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that the use of simple valuation heuristics by analysts can inhibit price discovery, especially in the presence of conservative accounting.

Unconditional Accounting Conservatism and Real Earnings Management

This research examines the relationship between unconditional accounting conservatism and real earnings management in China’s corporations. Using the regression models, the real earnings management proxies are found by the abnormal cash flow of operations, the abnormal operation costs and the abnormal discretionary expenses and the aggregated measures. The research sheds light on the negative relationship between unconditional accounting conservatism and real earnings management after controlling internal control quality and audit risk. The results of these inferences remain the same after dealing with the robustness analysis and the endogeneity concerns.

The Effect of Abnormal Operating Cash Flows on Unconditional Conservatism

This study attempts to find out the relationship between unconditional accounting conservatism and abnormal operating cash flows in Iranian firms. In this paper, unconditional conservatism is measured by Givoly and Hayen (2002), and abnormal operating cash flows is measured by (Dechew and Tang model, 2008). The statistical population studied at this research includes firms accepted in Tehran Stock Exchange, and the period of research is the years since 2006 to 2011. The systematic omission method has been used in this research in order to achieve the sample and 858 observations were chosen as the sample for research. Results show a negative relationship between unconditional accounting conservatism and abnormal operating cash flows. The results suggest that firms with upper levels of unconditional accounting conservatism appear to have lower abnormal operating cash flows.

Evaluating the Impact of Accounting Conservatism on Accrual - Based Earnings Management in Tehran Stock Exchange

Scope of this study, is evaluating the effect of accounting conservatism on accrual-based earnings management at accepted companies. And also, Time scope of the study is period from early of 2006 until the end of 2011. The sampling methods is used purposive sampling (systematic elimination method). To gathering data, we use Library method and Method of mining documents. And In order to analyze the data resulted from collected questionnaires deductive and descriptive statistical methods are used. So we can use Multi Regression test the hypothesis of the research. Findings show that conditional accounting conservatism have negative impact on accrual-based earnings management and statistically is non-significant and unconditional accounting conservatism have positive impact on accrual-based earnings management and statistically is significant. Also, Company size, Book-to Market Value and Rate of return on assets have positive impact on accrualbased earnings management at accepted companies in Tehran Stock Exchange

Investigating the Relationship Between Product Market Competition and Unconditional Accounting Conservatism (Case Study: Companies listed on Tehran Stock Exchange)

The purpose of this paper is investigating the relationship between product market competition and unconditional accounting conservatism of the companies listed on Tehran Stock Exchange. In this respect, the effect of firms’ size and financial leverage were controlled. Also, Herfindahl – Hirschman, Lerner and modified Lerner indexes used as a measure of product market competition. Statistical society of present study consists of 67 companies listed on Tehran Stock Exchange during 2004 to 2011. Multivariate linear regression analysis was used to test the research hypotheses. The results of research hypotheses test indicate that generally there is a significant relationship between indicators of product market competition and the ratio of total accruals before depreciation divided by average total assets and the ratio of book value divided by market value of firms’ net assets as criterion of unconditional accounting conservatism. This means that by increasing competition in every industry, companies apply conservatism in financial reporting in the presence of competitive pressures and reduce profit independent of current economic news.

The Role of Social Values, Accounting Values and Institutions in Determining Accounting Conservatism

The extant literature on cross cultural differences in conservatism finds that a mix of institutional and economic variables influences differences in the level of conservatism across countries. Using the modified Gray model Doupnik and Tsakumis (J Acc Lit 3(1): 1–20, 2004) we examine whether societal values are a neglected explanatory factor for differences in levels of accounting conservatism across countries. Both unconditional and conditional conservatism are measured. Social values are measured using both a composite value for conservatism Hope et al. (J Acc Public Policy 27(5): 353–357, 2008) and individual values from Hofstede and Hofstede in Cultures and organizations: Software of the mind (2nd ed., New York, McGraw-Hill, 2005). A test sample of 89,481 firm-years from 1989 to 2006, compressed to 341 (or 342) country-year observations from 22 countries provides the data for OLS regressions. We find that after controlling for previously documented legal and financial institutional variables, both conditional and unconditional accounting conservatism are greater in countries with more conservative societal and accounting values. The Hofstede value of femininity (the importance of caring for others) is also significant for both measures of conservatism. These findings provide a more complete model for further testing of accounting conservatism and other topics using societal values. They also provide support for the modified Gray model using archival data. Finally, while both dimensions of conservatism matter and while they share some common explanators, both have unique additional influencing factors in culture and institutions.

Accounting conservatism and voluntary corporate governance mechanisms by Australian firms

AbstractThis study examines the relationship between voluntary adoption of selected corporate governance mechanisms and accounting conservatism for a sample of firms listed on the Australian Securities Exchange (ASX) over the 11‐year period prior to the promulgation of the ASX Corporate Governance Council Good Governance Principles and Best Practice Recommendations in 2003. Using four accounting and market‐based accounting conservatism measures, our results provide evidence of both conditional and unconditional conservatism in accounting reporting for Australian firms. We find that voluntary audit committee formation, increasing board independence and decreasing board size are positively associated with unconditional accounting conservatism and negatively related to the degree of conditional conservatism. Our results support the contention that firms voluntarily adopting perceived best practice corporate governance mechanisms employ unconditional accounting conservatism as a complimentary agency control device and are consistent with the observed negative association between the unconditional and conditional forms of accounting conservatism practice.

Relationship Lending and Conservative Accounting? Empirical Evidence from Private Firms

This is the first study which analyzes the effect of relationship lending on accounting conservatism for private firms, and how this affects corporate finance. Based on a database containing the financial accounting data of approx. 8,600 private German firms, we first show that relationship lending is positively associated with the level of accounting conservatism, even when controlling for leverage and other factors. Relationship lending is measured by the proportion of loans provided by the main lender. Accounting conservatism is proxied by cumulative non-operating accruals and a novel conservatism score, both of which tend to considerably reflect unconditional conservatism. Second, we find that the cost of debt increases with the level of accounting conservatism. Third, we observe that relationship lending positively affects the amount of trade credit. Suppliers seem to interpret the existence of a lending relationship as an indication of a firm's creditworthiness. The results suggest that unconditional conservatism goes hand in hand with lending relationships even controlling for taxation issues. Our findings match the theoretical literature on implicit lending contracts. This literature claims that relationship lenders attempt to retain superior information to realize information rents that compensate for losses when lending to young firms and to firms in financial distress. Unconditional accounting conservatism may be used as a tool to retain superior information and to enhance implicit contracting.