Discussion of an Economic Framework For Conservative Accounting and Bushman and Piotroski (2006)

Abstract:     
We offer an economic framework for generating predictions about the demand for conservative accounting reports. We define conservatism as: More timely recognition of losses than gains as a result of the costs and benefits of reporting verifiable information by managers and/or firms being asymmetric. We also discuss Bushman and Piotroski's interpretation of the speeds of "good news recognition" and "incremental bad news recognition" in "Basu-type" regressions as separate signals about accounting conservatism. Finally, we suggest avenues for future research that seeks to investigate the links between institutions and contracts, and between contracts and conservatism.

Number of Pages in PDF File: 31

Keywords: Financial reporting, conservatism, timeliness of loss and gain recognition, international accounting, political and legal institutions, contracting, compensation and incentives, debt contracts

JEL Classification: M41, M44, K22, G15, G38, O57, M40, F30, G28

working papers series