The Conservatism Principle and Asymmetric Preferences Over Reporting Errors

Forthcoming at Behavioral Research in Accounting

64 Pages Posted: 17 Jul 2020 Last revised: 16 Aug 2023

See all articles by Jivas Chakravarthy

Jivas Chakravarthy

University of Texas-Arlington

Timothy W. Shields

Chapman University - The George L. Argyros College of Business and Economics; Chapman University - Economic Science Institute

Date Written: August 1, 2023

Abstract

Accounting conservatism has been described as deriving from preferences for reporting errors to be in the direction of understatement rather than overstatement. We pair Reporters with Users (who rely on Reporters’ information) in a multi-period experiment. We posit that under misaligned incentives that motivate aggressive reporting, Users view aggressive reports as reflecting exploitative intent and expect that a norm prohibiting aggressive reporting applies. We predict that Users use noisy reporting errors to gauge Reporters’ norm compliance. We find that, ceteris paribus, Users prefer not to be paired with Reporters producing overstatement errors likely to reflect aggressive reporting relative to Reporters producing understatement errors likely to reflect conservative reporting; alternatively, we find no such asymmetric preferences when the agents’ motives are aligned. The asymmetric preferences cannot be explained by agency theory predictions of payoff maximization or loss aversion. These moral preferences provide an initial condition from which conservatism can endogenously emerge.

Keywords: accounting conservatism; experimental economics; fairness intentions; moral hazard; normative expectations; trustworthiness

JEL Classification: B52; D81; D82; M41

Suggested Citation

Chakravarthy, Jivas and Shields, Timothy W., The Conservatism Principle and Asymmetric Preferences Over Reporting Errors (August 1, 2023). Forthcoming at Behavioral Research in Accounting, Available at SSRN: https://ssrn.com/abstract=3635015 or http://dx.doi.org/10.2139/ssrn.3635015

Jivas Chakravarthy (Contact Author)

University of Texas-Arlington ( email )

Arlington, TX 76013
United States

Timothy W. Shields

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

Chapman University - Economic Science Institute ( email )

1 University Drive
Orange, CA 92866
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
169
Abstract Views
1,449
Rank
328,601
PlumX Metrics