Rising Conservatism: Implications for Financial Analysis

Posted: 26 Feb 2002

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Carla Hayn

University of California at Los Angeles - Anderson School of Management

Abstract

We provide evidence that is consistent with an increase in reporting conservatism by U.S. companies in the past few decades. Using a constant sample of almost 900 companies, we examined several measures of accounting conservatism, including the level and rate of accumulation over time of negative nonoperating accruals, the differential timeliness of incorporating good news versus bad news in reported earnings, the skewness and variability of the earnings distribution relative to the cash flows distribution, and changes in the market-to-book ratio. The increased conservatism has contributed to a persistent and prevalent decline in reported profitability, an increase in the incidence of losses, and an increase in the dispersion of earnings. Increased conservatism affects financial ratios and P/E multiples. Thus, incorporating information on the level of a company's reporting conservatism improves valuations and the yield to investment strategies that are based on these ratios.

JEL Classification: G12, G31, M41, M44

Suggested Citation

Givoly, Dan and Hayn, Carla, Rising Conservatism: Implications for Financial Analysis. Available at SSRN: https://ssrn.com/abstract=301313

Dan Givoly (Contact Author)

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Carla Hayn

University of California at Los Angeles - Anderson School of Management ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9225 (Phone)

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