Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism

Abstract:     
We estimate a firm-year measure of accounting conservatism, examine its empirical properties as a metric, and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism. The results are consistent with the measure, C_Score, capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to three years ahead. Cross-sectional hypothesis tests suggest firms with longer investment cycles, higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism. Event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty.

Keywords: Conservatism, Firm-Year Measure, Properties, Information Asymmetry, Litigation

JEL Classifications: M41, M44, G34, G38, K22, D82

Working Paper Series