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We review and analyze the accounting literature that examines the effects of accounting conservatism on financial statements and financial statement users. We begin by analyzing how conservatism affects the reported numbers on the financial statements. These studies primarily evaluate how conservatism affects earnings quality, including earnings persistence and the presence of earnings management. Next, we assess the effect of accounting conservatism on the users of the financial statements. We identify three primary users of the financial statements: (1) equity market users (2) debt market users and (3) corporate governance users. Within each of these categories, we analyze the findings of prior research and explore unanswered research questions. By analyzing the effects of accounting conservatism from a diverse range of research topics, we inform the discussion on the costs and benefits of accounting conservatism.

The purpose of this paper is to examine the moderating effect of IFRS adoption on the relationship between foreign direct investment (FDI) and conditional accounting conservatism in South Asia.

This study uses the model developed by Basu (1997) and Ball and Shivakumar (2005) to examine the moderating effect of IFRS adoption on the relationship between FDI and conditional accounting conservatism. Data are tested by running panel generalized method of moments–2SLS estimation for the period of 2006–2015.

A moderating effect of IFRS adoption was found on the relationship between FDI and conditional accounting conservatism in South Asia.

This study contributes to the literature by adding new evidence on the moderating effect of IFRS adoption on the relationship between FDI and conditional accounting conservatism.

The relationship between FDI and conditional accounting conservatism was moderated by IFRS adoption in South Asia. This finding provides new evidence to the literature as well as for the policy makers to consider on IFRS adoption.

The purpose of this paper is to examine the moderating effect of International Financial Reporting Standards (IFRS) adoption on the relationship between accounting conservatism and the cost of equity in Canadian environmental, social, and corporate governance (ESG) firms.

Panel data was collected using the Thomson Reuters ASSET4 database on a sample of 284 Canadian ESG companies over the period 2007–2019.

The results obtained show a negative relationship between conditional conservatism and the cost of equity. The authors also find a negative relationship between unconditional conservatism and the cost of equity. In addition, IFRS adoption moderates the relationship between accounting conservatism and the cost of equity in Canadian ESG firms.

Future studies may extend the coverage of the study by including other countries and other sectors.

The results imply that prudent accounting signals information to investors about the quality of a company’s current and future earnings. The rates of return required by investors may be higher for conservative reporting companies that are more susceptible to opportunistic management discretion.

Although the previous literature has studied the direct correlation between accounting conservatism and the cost of equity, the present work focuses on examining the direct association between accounting conservatism and the cost of equity through the moderator effect of IFRS, which has not been widely used in studies of accounting conservatism until now.

The purpose of this paper is to explore the demand for conditional accounting conservatism from equity shareholders in state-controlled firms.

This study presents empirical investigation of firms listed on Hong Kong Stock Exchange from 1997 to 2013.

The first finding is the extent of conditional conservatism in state-controlled firms increases when the leverage ratio decreases. It is also found that the high control rights held by the government in state-controlled firms are associated with high conditional conservatism. In addition, further analyses document the an offsetting effect between high control rights and firm leverage; a reinforcing effect between high control rights and year of incorporation after 1992; and a substituting effect between high control rights and dividend payments.

These findings suggest that the demand from equity shareholders, in addition to the debt demand, can be an important determinant of conditional conservatism and examination of these differing sources of demand can enhance the understanding on accounting conservatism in state-controlled firms.

This paper aims to investigate the impact of cost stickiness on conditional conservatism.

The research sample consists of listed companies from 18 countries, using stock market indices of the BRICS, MIST, North Africa, USA and EU over the period ranging from 1997 to 2015. The authors use the firm-fixed effects method in the estimation of the models.

The results provide evidence of the existence of cost stickiness and conditional conservatism in the international context, using the Banker et al. (2016) model. They also argue that the conditional conservatism model (Basu, 1997) is overstated because it does not control for cost stickiness. In additional analyses, the authors conclude that the association between cost stickiness and accounting conservatism changes across country groups and across industries. The authors also document that the employee intensity and free cash-flow, as cost stickiness determinants, remain significant in the model including accounting conservatism. Moreover, the findings show that sticky cost behavior distorts inferences about standard demand drivers of conservatism such as leverage and size.

The findings are interesting and provide a better understanding of cost stickiness and conditional conservatism, and the interaction between these two phenomena in the international context, across country groups and across industries. To the best of the author’s knowledge, the study is the first one including free cash flow as a proxy for agency problem in the full model combining conservatism and cost stickiness models (Banker et al., 2016).

This paper aims to examine the relationship between firms’ decisions to expense employee stock options (ESOs) under the voluntary period of Statement of Financial Accounting Standard No. 123 (SFAS 123) and their market-to-book (MTB-1) ratio and conditional conservatism. Conservatism is chosen because, even though expensing of ESOs is a conservative accounting treatment, it is not obvious how the decision would be related to the MTB-1 ratio and conditional conservatism, particularly because the MTB-1 is a long-run measure of conservatism and the decision to voluntarily expense is examined over two years. The setting provides a unique opportunity to assess how two major proxies of conservatism are related.

Using firms listed in the S&P 1500 index, firms that expensed ESOs are compared to firms that disclosed only in the financial statements. The main comparison uses a logistic regression.

During the period when expensing ESOs was voluntary, SFAS 123, the MTB-1 ratio was negatively associated with ESO expense recognition, but conditional conservatism was positively associated with ESO expense recognition. The former is attributed to incentives of conservatism and the latter to the tenet of conservatism tending to reduce income.

The findings add to the literature/controversy on the negative relationship between the MTB-1 ratio and conditional conservatism. More important, they support using more than one measure of conservatism in studies that involve accounting conservatism. A limitation is that the findings are specific to voluntary ESO expense recognition.

This is the first study to examine how conservatism affects the choice to recognize an item on the financial statements or disclosure only. In addition, the study shows that firms were willing to incur real costs from their financial reporting.

This paper aims to examine the association between busy directors on corporate boards and accounting conservatism.

The 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.

The 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.

This 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.

This 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.

The purpose of this paper is to investigate whether the convergence of IFRS in ASEAN countries resulted in an improvement in financial-reporting quality, and in particular with regards the degree of conditional conservatism of financial reporting. Then, the authors investigate whether the convergence to IFRS and the degree of conditional conservatism is influenced by corruption as a proxy for the strength of ASEAN jurisdiction legal and enforcement systems.

The sample of this study is based on 22,085 firm-year observations from three ASEAN countries, namely, Malaysia, Thailand and Singapore from 2008 to 2014. This study employs a panel least square regression to test the effect of IFRS on two measures of conservatism which are asymmetric timeliness and accrual-based loss recognition. The conservatism data are extracted from ORBIS, while data for corruptions are extracted from Corruption Perception Index (CPI) that was released by Transparency International.

This study finds Convergence of IFRS enhance conditional conservatism. The findings are robust for two measures of conservatism which are asymmetric timeliness and accrual-based loss recognition. The result on unconditional conservatism finds that IFRS reduce unconditional conservatism, which supports that the code-law structures of the ASEAN countries as characterized by unconditional conservatism is reduced after IFRS convergence. A further test indicates that corruption reduces conditional conservatism in more corrupt countries.

This study focused on three ASEAN countries only, as they have consistent convergence dates to the IFRS. Therefore the result may not be generalized to other ASEAN countries.

The study provides implications to the regulators that IFRS enhance financial-reporting quality and reduce the randomness of decisions that are based on financial information as has been introduced by unconditional conservatism. Therefore it is important for the regulators to incorporate IFRS compliance into laws and regulations. Currently, IFRS compliance is not incorporated into laws and regulations for ASEAN countries, except for Malaysia. In Malaysia, Section 7 of the Financial Reporting Act 1997 (FRA) empowers the Malaysian Accounting Standards Board (MASB) to issue approved accounting standards for application in Malaysia. Under section 26D of the FRA, financial statements that are prepared or lodged with the Central Bank, Securities Commission or Registrar of Companies must comply with the standards issued by the MASB.

This paper extends the literature on the effect of IFRS on conservatism as it provides robust effect of IFRS on both conditional and unconditional conservatism. In addition, this study extends the literatures on the effect of corruptions in the relationship between IFRS and conditional conservatism.

García Lara et al. (2011) argue that there is a conservatism-related priced risk factor in US stock returns. To put this to the test, the authors aim to analyze whether the conditional conservatism effect comes from the loading on a conditional conservatism-related factor-mimicking portfolio (systematic risk) or the conservatism characteristic itself.

The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis et al. (2000).

The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor.

This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by García Lara et al. (2011).

The purpose of this paper is to investigate how the mandatory shift from domestic standards to International Financial Reporting Standards (IFRS) in Europe affects the conservatism level of reported accounting earnings (i.e. conditional conservatism), with the objective of gaining insights that are relevant for standard setters, capital providers and other users of financial accounting information.

Various models have been used in the literature to capture conditional conservatism. In the main tests in this paper, the authors use the Basu’s (1997) earnings-return specification. The authors use a panel data methodology to carry out the paper.

In contrast to previous international research studies, it is found that conditional conservatism has increased after the mandatory adoption of IFRS in Europe in 2005, with this increase being dependent on the extent of the accounting changes involved in switching from domestic accounting standards to IFRS reporting.

These findings are expected to be particularly relevant to some countries which have not yet adopted IFRS, such as the USA, Japan, Columbia, etc., but have announced their intention to adopt IFRS and to regulators in different jurisdictions who are interested in the impact of IFRS conversion.

The research to date, based on a multi-country setting, consistently shows a significant decrease in conditional conservatism after adopting IFRS. Based on a sample of firms from the European Union over a long period, the authors provide novel evidence for potentially unintended consequences of IFRS adoption, finding an increase in conditional conservatism behavior.