Conditional Conservatism and the Limits to Earnings Management

66 Pages Posted: 23 Oct 2012 Last revised: 8 Jun 2019

See all articles by Juan M. García Lara

Juan M. García Lara

Universidad Carlos III de Madrid - Department of Business Administration

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Fernando Penalva

IESE Business School - University of Navarra

Date Written: June 6, 2019

Abstract

We examine the impact of conditional conservatism on earnings management. Our findings support the view that conditional conservatism reduces accruals-based earnings management but also triggers a trade-off between accruals and real earnings management. Notwithstanding this trade-off, we show that, overall, more conditionally conservative firms manage earnings less, and as a result, they are less likely to either marginally or habitually beat earnings targets. To corroborate our findings, our identification strategy uses the passage of SFAS 121 as a plausibly exogenous regulatory change that increased the level of conditional conservatism but did not materially affect earnings management. We find that, after the regulation, treated firms reduce accruals-based earnings management and increase real earnings management, and are less likely to be marginal or habitual beaters of earnings benchmarks.

Keywords: conditional conservatism, earnings asymmetric timeliness, earnings management, manipulation of real operating activities

JEL Classification: G10, G31, M41

Suggested Citation

García Lara, Juan Manuel and Garcia Osma, Beatriz and Penalva, Fernando, Conditional Conservatism and the Limits to Earnings Management (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=2165694 or http://dx.doi.org/10.2139/ssrn.2165694

Juan Manuel García Lara

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Fernando Penalva (Contact Author)

IESE Business School - University of Navarra ( email )

Ave. Pearson 21
Barcelona, Barcelona 08034
Spain
932534200 (Phone)
932534343 (Fax)

HOME PAGE: http://www.iese.edu

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