Conditional Conservatism and Accrual Persistence

36 Pages Posted: 16 Jan 2011

See all articles by Yutao Li

Yutao Li

University of Lethbridge

Wenjun Zhang

Dalhousie University

Date Written: January 14, 2011

Abstract

Under the conservative accounting principle, unreliable accruals are expected to reflect losses in a timely manner (Guay and Verrecchia 2006) and losses are less persistent (Basu 1997; Ball and Shivakumar 2006). Accordingly, the practice of accounting conservatism may cause lower persistence of unreliable accruals. This paper aims to provide an insight on two issues: (1). whether unreliable accruals reflect losses relative to gains on a timelier basis than reliable accruals do; (2). whether firm-level conditional conservatism affects the persistence of accrual components. Using a sample of 106,141 firm-year observations from 1968 to 2006, we find that reliable accruals exhibit greater asymmetric timeliness, compared to unreliable accruals, suggesting that managers are slower at recognizing losses relative to gains in unreliable accruals than they do in reliable accruals. In addition, we find that conservatism affects accrual persistence only to the extent that it reduces the persistence of reliable accruals, but not that of unreliable accruals, suggesting that managers do not incorporate greater portion of transitory losses in unreliable accruals than they do in reliable accruals.

Suggested Citation

Li, Yutao and Zhang, Wenjun, Conditional Conservatism and Accrual Persistence (January 14, 2011). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1740752 or http://dx.doi.org/10.2139/ssrn.1740752

Yutao Li (Contact Author)

University of Lethbridge ( email )

Lethbridge, Alberta T1K5E8
Canada

Wenjun Zhang

Dalhousie University ( email )

Halifax
Canada

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