The Economic Determinants of Conditional Conservatism

Lara, Juan Manuel Garcı́a; Osma, Beatriz Garcı́a; Peñalva, Fernando

doi:10.1111/j.1468-5957.2008.02122.x

Cited by 103 publications

(75 citation statements)

References 83 publications

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“…Considering the common belief that the differential timeliness of earnings refers to conservatism, these results suggest that earnings management considerably impacts a firm's level of conservatism. Similar to his study, Lara et al (2009) find that firms with strong-governance and that show a higher level of conservatism tend to use discretionary accruals to inform investors about 'bad news' in a timely manner than 'good news'. Results from both studies imply that firms that practice more conservative accounting are likely to use negative discretionary accruals to report bad news in a timely manner.…”

Section: The Relationship Between Accounting Conservatism and Earningsupporting

confidence: 59%

Practice Of Accounting Conservatism In MBE Firms

Park

Lee²

2014

JABR

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Managers sometimes manage earnings upward (i.e., engage in earnings management) or guide analyst forecasts downward (i.e., engage in expectation management) to meet or beat analysts' earnings forecasts (MBE). Our results suggest that certain management behavior to achieve MBE is highly associated with firms' level of accounting conservatism. In detail, we find that (1) the level of accounting conservatism decreases as firms achieve MBE in consecutive years, (2) engaging in earnings management to achieve MBE lowers firms' level of conservatism, and (3) firms that achieve MBE in consecutive years (CMBE firms) whose credit rating had been elevated practice less conservative accounting implying that the MBE string itself might act as a substitute for conservative accounting in lowering firms' cost of debt.Keywords: Accounting Conservatism; Earnings Forecast; Earnings Management; Expectation Management INTRODUCTIONanagers sometimes manage earnings upward or guide analyst forecasts downward to meet or beat analysts' earnings forecasts (hereafter MBE). This is because managers consider analyst forecasts as an important performance threshold (Degeorge et al. 1999). Moreover, the market actually appreciates firms that achieve MBE with a premium (Bartov et al. 2002). Due to such importance of MBE, the number of MBE-achieving firms has increased in recent years (Brown 1997).However, there has been little research concerning the firms that consistently meet or beat earnings forecast for consecutive years (hereafter CMBE firms) 1 . While most of studies focuse on MBE firms, Kasznik and McNichols (2002) first show that there is a positive relation between MBE consistency and firm value. Bartov et al. (2002) also find that firms with consecutive MBE have a greater premium in the stock market. Recently, Kross et al. (2009) provide evidence that firms with established MBE strings 2 are more likely to guide analyst forecast downward by providing 'bad news' management forecasts, and the effect of this downward guidance diminishes as a firm's MBE string increases. Nonetheless, none of these studies to our knowledge have yet established the link between CMBE firms and their accounting behavior.In this study, we focus on one of the most important practice in accounting, the 'accounting conservatism'. This practice guidesfirms to recognize all probable losses as they incur, but defer any revenues until it becomes verifiable. Therefore, firms that practice high degree of accounting conservatism would reflect 'bad news' in their financial statement more timely compared to those that do not (Basu, 1997). In a similar vein, we suspect that firms that consistently release 'good news' around earnings announcement date to achieve MBE practice less conservative accounting.In this paper, by using firm-year measure of accounting conservatism, we test the relationship between the level of accounting conservatism and the MBE string as well as management behavior. Our evidence suggests that the level of accounting conservatism decreases...

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Section: The Relationship Between Accounting Conservatism and Earningsupporting

confidence: 59%

Practice Of Accounting Conservatism In MBE Firms

Park

Lee²

2014

JABR

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“…Regarding litigation risk, Watts (2003) points at litigation risk as one of the main determinants of conditional conservatism, and empirical evidence by Qiang (2007) and Garcia Lara et al (2009b) supports this hypothesis using different proxies for conditional conservatism and litigation risk.…”

Section: Developing and Assessing The Construct Validity Of A Firm-spmentioning

confidence: 86%

“…As highlighted by Watts (2003) and demonstrated by Qiang (2007), Ball, Robin and Sadka (2008), and Garcia Lara et al (2009b), among others, debt contracting is one of the main determinants of conditional conservatism. We use leverage as a proxy for the debt-related pressures faced by the firm.…”

Section: Developing and Assessing The Construct Validity Of A Firm-spmentioning

confidence: 93%

Conditional conservatism and cost of capital

2010

Self Cite

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Forthcoming in Review of Accounting Studies* We are grateful to Alon Brav for providing access to the ex ante cost of equity capital estimates, and to Dan Segal for his assistance in computing the CR conservatism proxy. We also appreciate the comments and suggestions from Gauri Bhat, Peter Electronic copy available at: http://ssrn.com/abstract=1544307 Conditional Conservatism and Cost of Capital ABSTRACTWe empirically test the association between conditional conservatism and cost of equity capital.Conditional conservatism imposes stronger verification requirements for the recognition of economic gains than economic losses, resulting in earnings that reflect losses faster than gains.

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“…Prior literature demonstrates that when high corporate profitability attracts the attention of regulators (e.g. utilities), managers often engage in more conservative accounting practices, attempting to lower public visibility and intervention by reporting diminished economic results (García Lara, García Osma, & Penalva, 2009). Alternatively, crisis-prone and financially distressed firms are more susceptible to delaying the recognition of current losses so as to disclose improved financial measures, a tendency which is more intense when regulatory monitoring is introduced and enforced (Alam & Petruska, 2012).…”

Section: Hypotheses Developmentmentioning

confidence: 99%

Managing the European football industry: UEFA’s regulatory intervention and the impact on accounting quality

Dimitropoulos

Leventis

Dedoulis

2016

European Sport Management Quarterly

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Research question: European football clubs are known for an institutionalized management culture which prioritizes on-field success over financial performance. This creates an extremely competitive context within which most clubs operate, producing debts and deficits. However, in order to secure clubs' long-term financial viability, Union of European Football Association (UEFA) has introduced regulatory and monitoring processes tied to accounting data in order to assess clubs' financial performance. This study aims to determine whether UEFA's framework has an impact on clubs' management policies with regard to accounting quality. Research methods:The study employs a sample of 109 European football clubs for a seven-year period, 2008-2014 (three years before and four years after the regulatory intervention), to investigate the impact of the reform upon management practices related to accounting. Following prior literature, we employ the three most commonly used proxies of accounting quality: earnings management, conditional accounting conservatism and auditor switching. Results and findings: This study demonstrates that, at the expense of accounting quality, club management seeks to promote the image of a financially robust organization in order to secure licensing and, consequently, much needed funding from UEFA. In this manner, the dominance of a management culture which impairs financial performance is further cemented. Implications: UEFA should take into consideration that, in a financially distressed industry focused on achieving success on the field of play, the imposition of regulatory monitoring tied to accounting data inevitably leads to a loss of organizational credibility and transparency. Hence, UEFA's intervention should be accompanied by the imposition of a corporate governance framework which would aim to rearrange club management priorities by facilitating a change in institutionalized mentalities. ARTICLE HISTORY

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The Economic Determinants of Conditional Conservatism

Cited by 103 publications

References 83 publications

Practice Of Accounting Conservatism In MBE Firms

Practice Of Accounting Conservatism In MBE Firms

Conditional conservatism and cost of capital

Managing the European football industry: UEFA’s regulatory intervention and the impact on accounting quality

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