The Economic Determinants of Conditional Conservatism
60 Pages Posted: 18 Nov 2008
Date Written: November 18, 2008
We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognised otherwise, or by delaying the recognition of current economic gains that would have been recognised had circumstances been different.
Keywords: Conservatism, contracting, taxation, political costs, litigation risk
JEL Classification: M41, M44, D82, G38, H25, H32
Suggested Citation: Suggested Citation