A Measurement Approach to Conservatism and Earnings Management

Abstract:     
This paper develops a model of accounting measurement to study the design of the optimal measurement rule. The core of the model is a representation of accounting measurement process that features the manager’s opportunistic influence and the use of verification as a response. To safeguard against the manager’s ex post opportunism, the optimal measurement rule is conservative in the sense that it requires more verification of the transaction characteristics favorable to the manager. The model clears up some criticisms of conservatism by differentiating the property of an accounting measure from that of an accounting measurement rule that generates the accounting measure.

Number of Pages in PDF File: 42

Keywords: Conservatism, Accounting Measurement, Debt Covenant, Earnings Management, Accounting-motivated Transactions

Accepted Paper Series