Mandatorily Conservative Accounting: Evidence and Implications

Abstract:     
A large body of accounting research concludes that various economic incentives induce managers to engage in the discretionary application of conservative accounting. We extend existing research by modeling the impact of mandatory accounting rules on conservative accounting. For example, accounting rules often mandate impairments when assets’ fair values drop materially below their book values. After controlling for mandatorily conservative accounting, we find that some previous variables representing economic incentives become insignificant.

Number of Pages in PDF File: 53

Keywords: mandatory conservatism, conditional conservatism, book-to-market, asset impairment

JEL Classification: M41, C23, D21, G32

working papers series