The Effects of Accounting Conservatism on Financial Statements and Financial Statement Users: A Review of the Literature
George W. Ruch
University of Oklahoma - Michael F. Price College of Business
Gary K. Taylor
University of Alabama - Culverhouse College of Commerce & Business Administration
May 1, 2014
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.
Number of Pages in PDF File: 45
Keywords: Accounting conservatism, financial reporting quality, earnings quality, market returns, contracting
Date posted: September 22, 2011 ; Last revised: September 9, 2014
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