Estimating and validating a firm‐year‐specific measure of conservatism: Australian evidence

Cheng Y. Lai · Stephen L. Taylor

34 citations0/0 files storedAccounting and Finance

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

Abstract We provide new evidence on the asymmetric timeliness with which economic gains and losses are recognized in Australian financial reporting (i.e. conservatism), as well as some of the factors associated with variation in conservatism. We first derive, and then estimate and subsequently validate, a firm‐year‐specific measure of conservatism (C_Score) in the manner suggested by Khan and Watts (2007) . Our results indicate that conservatism is a pervasive feature of the Australian financial reporting environment. Conservatism is positively associated with stock return volatility, investment cycle length and prior period conservatism, and it is negatively associated with firm age, firm size and leverage. The results are an encouraging start for research into the causes and consequences of conservatism in Australian financial reporting.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1968An Empirical Evaluation of Accounting Income Numbers 1997The conservatism principle and the asymmetric timeliness of earnings1 1992The investment opportunity set and corporate financing, dividend, and compensation policies 2000The effect of international institutional factors on properties of accounting earnings 2003Conservatism in Accounting Part I: Explanations and Implications 2004Costs of Equity and Earnings Attributes 2004Earnings quality in UK private firms: comparative loss recognition timeliness

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