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


Mozaffar Khan


Harvard Business School; University of Minnesota - Twin Cities - Carlson School of Management

Ross L. Watts


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

August 17, 2009

MIT Sloan Research Paper No. 4640

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.

Number of Pages in PDF File: 59

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

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

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Date posted: March 7, 2007 ; Last revised: January 9, 2010

Suggested Citation

Khan, Mozaffar and Watts, Ross L., Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism (August 17, 2009). MIT Sloan Research Paper No. 4640. Available at SSRN: http://ssrn.com/abstract=967348 or http://dx.doi.org/10.2139/ssrn.967348

Contact Information

Mozaffar Khan (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 362
Boston, MA 02163
United States
University of Minnesota - Twin Cities - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E52-325
Cambridge, MA 02142
United States
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