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Open Access
Article
Publication date: 1 January 2024

Abbas Ali Daryaei, Yasin Fattahi and Ali Aldbs

The purpose of this paper is to focus on exploring the mutual impact of accounting conservatism and corporate social responsibility (CSR).

Abstract

Purpose

The purpose of this paper is to focus on exploring the mutual impact of accounting conservatism and corporate social responsibility (CSR).

Design/methodology/approach

To empirically assess the theoretical arguments the authors estimate a simultaneous equations system for accounting conservatism and corporate social responsibility determination by two-stage least squares in a sample of 175 firms listed on the Tehran Stock Exchange (TSE) for the period 2009–2019.

Findings

The results of the present study showed that accountability in companies listed on the TSE has led to an increase in the use of conservative practices. Therefore arguably, companies that seek CSR activities are more conservative in preparing and presenting financial reports. Also, companies that engage in conservative practices for the benefit of stakeholders are better able to implement CSR activities to meet stakeholder obligations. These results show a two-way relationship between CSR and accounting conservatism.

Practical implications

According to the results obtained from this study and the elimination of conservatism from the qualitative features of financial reporting in International Accounting Standards, it is recommended for the trustees and authorities of national accounting standards to decide whether this qualitative feature is effective or not.

Originality/value

Furthermore, the findings of this study suggest that the application of corporate social responsibility theories calls for more inquiry.

Details

Asian Journal of Accounting Research, vol. 9 no. 1
Type: Research Article
ISSN: 2459-9700

Keywords

Article
Publication date: 14 April 2023

Yamina Chouaibi and Saida Belhouchet

The purpose of this paper is to examine the moderating effect of International Financial Reporting Standards (IFRS) adoption on the relationship between accounting conservatism…

Abstract

Purpose

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.

Design/methodology/approach

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

Findings

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.

Research limitations/implications

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

Practical implications

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.

Originality/value

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.

Details

Journal of Global Responsibility, vol. 14 no. 4
Type: Research Article
ISSN: 2041-2568

Keywords

Article
Publication date: 22 May 2023

Yun Shen, Vito Mollica and Aldo Fortunato Dalla Costa

This study sheds new light on the personality trait and provides evidence regarding the relation between narcissism and desirable accounting practices, specifically the impact of…

Abstract

Purpose

This study sheds new light on the personality trait and provides evidence regarding the relation between narcissism and desirable accounting practices, specifically the impact of CEO narcissism on accounting conservatism.

Design/methodology/approach

The authors test the relation between CEO narcissism and accounting conservatism for a sample of 907 US companies and their corresponding CEOs for the period between 2010 and 2018. The authors apply three established models of accounting conservatism and measure executives' narcissism using a non-intrusive approach ubiquitous in the literature.

Findings

The authors find that CEO narcissism is associated with speculative accounting practices in the form of timely recognition of positive news and more prudent financial reporting of anticipated negative news. The authors provide the first empirical evidence that, despite its well-known negative effects on corporate financial reporting, executive narcissism can also produce positive outcomes.

Originality/value

While managerial overconfidence has received much attention, the effects of executives' narcissism are still widely unexplored (Chatterjee and Hambrick, 2007). The authors thus contribute to the literature by investigating the relationship between CEOs' narcissism and accounting conservatism. The authors conjecture CEO narcissism should have a twofold effect on prudent financial reporting. On the one hand, CEOs' narcissism should be associated with low levels of unconditional conservatism due to excessively fast good news recognition. On the other hand, narcissistic executives should be associated with early recognition of negative news and hence with higher levels of conditional conservatism.

Details

Journal of Accounting Literature, vol. 46 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Open Access
Article
Publication date: 3 August 2022

Mariem Khalifa and Samir Trabelsi

The purpose of this paper is to examine whether managers of bankrupt firms are more or less conditionally conservative in their financial reporting relative to non-bankrupt firms…

Abstract

Purpose

The purpose of this paper is to examine whether managers of bankrupt firms are more or less conditionally conservative in their financial reporting relative to non-bankrupt firms. The study further examines the cross-sectional differences in conditional conservatism among bankrupt and non-bankrupt firms.

Design/methodology/approach

The study employs a sample of US firms to investigate conditional conservatism in firms that experience financial distress and go bankrupt relative to non-stressed non-bankrupt firms. The study also uses switching regression models to identify the drivers of the cross-sectional difference in conditional conservatism among bankrupt and non-bankrupt firms.

Findings

Empirical results show that bankrupt firms are timelier in recognizing bad news than good news when compared to non-bankrupt firms. The higher level of conditional conservatism in bankrupt firms is mainly driven by their higher levels of leverage and tax-reduction incentives. The cross-sectional analyses show that these results largely hold for more leveraged firms and firms with higher tax costs. Taken together, these results suggest that the conservative tendency of managers of bankrupt firms can stem from the agency problem between lenders and managers and from tax-decreasing motivations.

Originality/value

The novelty of the authors’ research stands in studying the drivers of the cross-sectional differences in conditional conservatism between bankrupt and non-bankrupt firms and specifically, the demonstration that taxation also induces conditional conservatism in the setting of ex post bankrupt firms.

Details

China Accounting and Finance Review, vol. 25 no. 1
Type: Research Article
ISSN: 1029-807X

Keywords

Article
Publication date: 23 September 2022

Minyoung Noh, Jimi Park and Shijin Yoo

The authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.

Abstract

Purpose

The authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.

Design/methodology/approach

To examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.

Findings

SE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.

Research limitations/implications

Implication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.

Originality/value

This study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.

Details

Managerial Finance, vol. 49 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 2 August 2021

Ismaanzira Ismail, Rohami Shafie and Ku Nor Izah Ku Ismail

This paper aims to examine whether conditional conservatism is affected by chief financial officer (CFO) attributes as this issue is understudied in Malaysia. Given that CFOs have…

Abstract

Purpose

This paper aims to examine whether conditional conservatism is affected by chief financial officer (CFO) attributes as this issue is understudied in Malaysia. Given that CFOs have a direct responsibility for financial reporting, therefore, their individual attributes are important in influencing conservatism in financial reporting.

Design/methodology/approach

This study uses non-financial listed firms in the Main Market of Bursa Malaysia from the years 2016 until 2019.

Findings

The results show that CFOs’ attributes, namely, gender, age, education level and ethnicity, affect earnings conservatism. To test for robustness, the authors use difference-in-difference, propensity score-matching and unconditional conservatism, namely, market-to-book ratio and the authors find the results hold with an exception for age and education level. Further, the effect of these attributes is more profound in non-Big4 audited firms, suggesting that CFO attributes act as a substitute mechanism for lower audit quality.

Originality/value

This study complements existing studies by documenting the first evidence on the significant effects of CFOs’ attributes in influencing accounting conservatism in an emerging country, namely, Malaysia. This is the first paper, to the humble knowledge, that examines CFOs’ attributes on accounting conservatism in Malaysia.

Details

Pacific Accounting Review, vol. 33 no. 4
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 13 March 2009

Ann L.‐C. Chan, Stephen W.J. Lin and Norman Strong

The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and…

3481

Abstract

Purpose

The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and ex post (earnings or conditional) conservatism. It is argued that the two dimensions of conservatism convey different information to the market about the quality of accounting numbers and have different associations with equity investors' required rates of return.

Design/methodology/approach

The cost of equity capital estimates are based on the Ohlson and Juettner‐Nauroth model. The paper applies a regression model to examine the relationship between the cost of equity capital and accounting conservatism controlling for other risk factors.

Findings

The findings indicate that ex ante conservatism is associated with higher quality of accounting information and lower costs of equity capital and that ex post conservatism is associated with lower quality of accounting information and higher costs of equity capital.

Research limitations/implications

The firm‐level conservatism measures may suffer from measurement error. Future studies can be more specific in determining proxies for ex ante and ex post conservatism.

Practical implications

The results imply that conservative accounting signals information to investors about the quality of a firm's current and future earnings. Investors' required rates of returns may be higher for conservative reporting firms that are more susceptible to opportunistic management discretion.

Originality/value

The paper provides the first UK evidence on the effect of different dimensions of conservatism on equity investors' required rates of return.

Details

Managerial Finance, vol. 35 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 27 February 2015

George W. Ruch and Gary Taylor

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…

1720

Abstract

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.

Details

Journal of Accounting Literature, vol. 34 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 2 November 2018

Marziana Madah Marzuki and Effiezal Aswadi Abdul Wahab

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Research limitations/implications

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.

Practical implications

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.

Originality/value

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.

Details

Asian Review of Accounting, vol. 26 no. 4
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 8 March 2011

Song Zhu and Donglin Xia

China's securities market is growing gradually as well as the investors, analysts, intermediates and regulation authorities. Accounting earnings is a key determinant among the…

2417

Abstract

Purpose

China's securities market is growing gradually as well as the investors, analysts, intermediates and regulation authorities. Accounting earnings is a key determinant among the factors influencing stock prices, which even overreacts to earnings. Split‐stock reform (all‐circulation reform) in China provides a chance for investors to revaluate the stock prices. The purpose of this paper is to investigate the market reaction during the reform from the perspective of accounting conservatism.

Design/methodology/approach

Using the data of companies completing the split‐stock reform, this paper empirically investigates how the accounting conservatism influences the market reaction around re‐open day after the reform.

Findings

Accounting information plays its role on stock pricing through the reform of split‐stock reform in the China securities market, evident in the significantly positive relation between the proxies of accounting conservatism and cumulative abnormal returns for one day, three days, ten days and 30 days around re‐open day after the reform. Also, the profitability of listed firms in the past will further improve the positive relation between conservatism and market reaction.

Originality/value

There is ample theoretical work on stock pricing of accounting conservatism but empirical work is scarce, so this paper provides more evidence for the role of stock pricing of accounting conservatism, especially in emerging markets. Second, current research on accounting conservatism in China is focusing on whether conservatism exists and how the conservatism varies; this paper further extends the research field of conservatism from the pricing perspective. Third, researches based on the determinants of stock compensation and market reaction on stock reform lack theoretical analysis, while this paper provides a theory basis for the market reaction during the stock reform.

Details

Nankai Business Review International, vol. 2 no. 1
Type: Research Article
ISSN: 2040-8749

Keywords

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