A Wealth Based Explanation for Earnings Conservatism

EFA 0548; Lancaster University Management School - Dept. of Accounting and Finance WP: 2000/009

46 Pages Posted: 22 Jan 2001

See all articles by Martien Jan Peter Lubberink

Martien Jan Peter Lubberink

Victoria University of Wellington - School of Accounting and Commercial Law

Carel Huijgen

University of Groningen - Faculty of Economics and Business

Date Written: November 27, 2000

Abstract

This paper investigates the relation between managers' wealth concerns and the degree of conservatism in reported earnings. The nature of accounting causes reported earnings to be inherently untimely. The timeliness is less prominent for gains than for losses, which results in conservatively reported earnings numbers. Earnings conservatism serves an important purpose, it reduces the likelihood of conflict about the ex-post distribution of a firm's cash flows among parties associating with a firm. Conservatism enables outside parties to learn efficiently about the quality of a firm's manager, which is beneficial for the manager. Unlike existing research, this paper assumes that managers value the benefits of conflict reduction differently. This paper hypothesizes that a manager's wealth concerns determine the degree of conservatism. The empirical results confirm this hypothesis: Risk averse managers report earnings more conservative than do less risk averse managers. These results shed a new light on the mechanism driving earnings conservatism.

Keywords: Financial Reporting, Capital Markets, Earnings Conservatism.

JEL Classification: G14, G38, M41, M43

Suggested Citation

Lubberink, Martien Jan Peter and Huijgen, Carel A., A Wealth Based Explanation for Earnings Conservatism (November 27, 2000). EFA 0548; Lancaster University Management School - Dept. of Accounting and Finance WP: 2000/009, Available at SSRN: https://ssrn.com/abstract=253854 or http://dx.doi.org/10.2139/ssrn.253854

Martien Jan Peter Lubberink (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

Carel A. Huijgen

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands
+3150 363 7206 (Phone)

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