Growth, Managerial Reporting Behavior, and Accounting Conservatism

39 Pages Posted: 28 Feb 2008

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Kiran Parthasarathy

University of Houston - C.T. Bauer College of Business; University of Houston

Shiva Sivaramakrishnan

Rice University

Date Written: February 2008

Abstract

This study investigates whether firm growth is a determinant of the degree of conservatism in financial reports. Using the differential timeliness measure of Basu (1997), and a modified version of the Basu model that employs the change in earnings as the dependent variable and controls for the component of earnings change that is independent of accounting conservatism, we document that the degree of conservatism is far more pronounced for low-growth firms than high-growth firms. This suggests that the aggressive reporting behavior of high-growth firms may be muting the extent of conservatism in their financial reports. Indeed, when we directly examine discretionary reporting behavior, we find evidence of a lower degree of conservatism for higher levels of reporting discretion (i.e., more positive discretionary accruals). Thus, using both a driver of aggressive reporting behavior (growth), and a measure of such behavior (discretionary accruals), we are able to explain cross-sectional variation in the degree of conservatism.

Keywords: conservatism, growth, managerial reporting behavior, modifed DT model

JEL Classification: M41, M44, M49, G31

Suggested Citation

Lobo, Gerald J. and Parthasarathy, Kiran and Parthasarathy, Kiran and Sivaramakrishnan, Shiva, Growth, Managerial Reporting Behavior, and Accounting Conservatism (February 2008). Available at SSRN: https://ssrn.com/abstract=1098294 or http://dx.doi.org/10.2139/ssrn.1098294

Gerald J. Lobo (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Kiran Parthasarathy

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

University of Houston ( email )

Houston, TX 77204-6021
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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