Abstract

http://ssrn.com/abstract=921619
 
 

References (53)



 
 

Citations (69)



 


 



The Information Role of Conservatism


Ryan LaFond


BlackRock

Ross L. Watts


Massachusetts Institute of Technology (MIT) - Sloan School of Management

April 26, 2007


Abstract:     
In this paper we argue that information asymmetry between firm insiders and outside equity investors generates conservatism in financial statements. Conservatism reduces the manager's incentives and ability to manipulate accounting numbers and so reduces information asymmetry and the deadweight losses that information asymmetry generates. This increases firm and equity values.

Our empirical tests are consistent with our proposition that information asymmetry is significantly positively related to conservatism after controlling for other demands for conservatism. Further, our tests are more consistent with our prediction that changes in information asymmetry between equity investors lead changes in conservatism than the FASB's proposition that conservatism produces information asymmetry among equity investors. An important implication is that, if the FASB was successful in meeting their stated goal of eliminating conservatism, they would increase information asymmetry between investors, not reduce it. This outcome is inconsistent with the objectives of the Securities Acts.

Number of Pages in PDF File: 59

Keywords: Conservatism, Accounting Standards, Earnings Management, Corporate Governance, Securities Litigation

JEL Classification: M41, M43, M44, G32, G33, G34, G35, K22

working papers series


Download This Paper

Date posted: August 2, 2006  

Suggested Citation

LaFond, Ryan and Watts, Ross L., The Information Role of Conservatism (April 26, 2007). Available at SSRN: http://ssrn.com/abstract=921619 or http://dx.doi.org/10.2139/ssrn.921619

Contact Information

Ryan LaFond (Contact Author)
BlackRock ( email )
400 Howard Street
San Francisco, CA 94105
United States
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E52-325
Cambridge, MA 02142
United States
Feedback to SSRN


Paper statistics
Abstract Views: 10,027
Downloads: 3,602
Download Rank: 1,160
References:  53
Citations:  69

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.609 seconds