Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism
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
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
Date posted: March 7, 2007 ; Last revised: January 9, 2010
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