The Effect of Conditional Accounting Conservatism on the Predictive Ability of Accruals Components with Respect to Future Cash Flows

48 Pages Posted: 26 Jun 2017

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Wei Chen

University of Connecticut

Sam Melessa

University of Iowa - Department of Accounting

Date Written: June 24, 2017

Abstract

We investigate the impact of conditional conservation on the ability of accruals and its components to predict future cash flows. We first demonstrate that conditional conservatism has increased over the period from 1988 to 2013 due to an increase in timely loss recognition and asymmetric timely loss recognition. We find that while conditional conservatism that is manifest in both special-item and non-special-item accruals has increased over time, the temporal increase in conservatism is primarily attributable to non-special-item accruals. Next, we show that the increase in timely loss recognition is associated with an increase in the ability of accrual components to predict future cash flows in periods of bad news, consistent with asymmetric timely loss recognition increasing the ability of accruals to predict future cash flows. These findings stand in contrast to the belief that conditional conservatism reduces the valuation role of GAAP earnings as some have claimed.

Keywords: conditional conservatism; asymmetric timeliness; accruals; special items; cash flow predictability.

Suggested Citation

Collins, Daniel W. and Chen, Wei and Melessa, Sam, The Effect of Conditional Accounting Conservatism on the Predictive Ability of Accruals Components with Respect to Future Cash Flows (June 24, 2017). Available at SSRN: https://ssrn.com/abstract=2992150 or http://dx.doi.org/10.2139/ssrn.2992150

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Wei Chen

University of Connecticut ( email )

Department of Accounting
Storrs, CT 06269
United States

Sam Melessa

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

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