Growth, Managerial Reporting Behavior, and Accounting Conservatism
39 Pages Posted: 28 Feb 2008
Date Written: February 2008
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: Suggested Citation