The Association between Accounting Conservatism and Cash Holding, Dividends and Leverage

Abstract

This paper examines the effect of accounting conservatism on several financial decisions in Jordan. In particular, it aims to expose the effect of accounting conservatism on cash holdings, dividends distributions, and leverage for a sample of 83 Jordanian industrial and service firms listed on the Amman Stock Exchange (ASE) for the period 2015-2019. The feasible generalised least squares (FGLS) regression technique is used to test the association between accounting conservatism and financial decisions. The findings of this paper reveal a negative and significant relationship between accounting conservatism and cash holding. However, positive but insignificant relationships are reported between accounting conservatism and both dividends distributions and leverage. These findings have important implications for investors, corporate managers, and policymakers. The study recommends that future research use different measures of leverage, such as debt-to-equity ratio and long-term debt to equity ratio, in order to compare the results of different measuring instruments. It also recommends incorporating other measures of conservatism, such as market to book ratio and timeliness asymmetric measure.
 
 Received: 23 March 2022 / Accepted: 20 June 2022 / Published: 5 July 2022

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“…Specifically, due to a tendency for management to inflate accounting profits, adverse financial performance disclosures tend to be more dependable compared to positive ones (Hui et al, 2009). In addition, conservatism not only curbs management bias in financial reporting, restricts opportunistic behaviors, and curtails managerial discretion in manipulating results (Dechow et al, 2010), but also lowers the risk of legal disputes (Atwa et al, 2023). Additionally, research suggests that conservatism contributes to upholding the stability and predictability of firms.…”