Accounting Conservatism and its Effects on Financial Reporting Quality: A Review of the Literature

Abstract:     
We review and summarize the accounting literature examining the effects of accounting conservatism on financial reporting quality. Much of the empirical accounting research attempts to provide evidence relating to the effects of accounting conservatism on financial reporting quality. Financial reporting quality is measured through reported accounting numbers, capital market activity, contracting outcomes, and financial decisions. Accordingly, we summarize accounting conservatism research into three primary categories: (1) earnings quality, (2) capital markets, and (3) contracting efficiency. By summarizing the effects of accounting conservatism, we provide a mechanism to help assess the potential costs and benefits associated with accounting conservatism vis-à-vis financial reporting quality.

Number of Pages in PDF File: 87

Keywords: Accounting conservatism, financial reporting quality, earnings quality, market returns, contracting

working papers series