Balance Sheet vs. Earnings Conservatism in Europe

Posted: 3 Jun 2004

See all articles by Juan M. García Lara

Juan M. García Lara

Universidad Carlos III de Madrid

Araceli Mora

University of Valencia - Department of Accounting


In this study we extend prior research on the international analysis of accounting conservatism (Joos and Lang, 1994; Ball et al., 2000; Giner and Rees, 2001), by examining the level of accounting conservatism across eight European countries (United Kingdom, Germany, France, Switzerland, the Netherlands, Italy, Spain and Belgium), and assessing the statistical significance of the differences among them. The definitions of conservatism that we use are on the one hand, the Feltham and Ohlson (1995) definition, which implies a persistent understatement of book value of shareholders' equity (balance sheet conservatism). On the other hand, we use the one proposed by Basu (1997), that is, a timelier recognition of bad news in earnings relative to good news (earnings conservatism). We also address the possible scale problems of the models used to measure balance sheet conservatism. Finally, we check whether our comparative results could be influenced by a different sample composition in each country. Our results show that there are both balance sheet and earnings conservatism practices in all countries under study. In addition, while continental countries show larger balance sheet conservatism, differences in earnings conservative practices between countries are not that pronounced, although they tend to be larger in the UK. We also find that the existence of balance sheet conservative practices is associated with reduced levels of earnings conservatism, which is consistent with the results in Pope and Walker (2003).

Keywords: Capital Markets, Harmonisation, Earnings properties

JEL Classification: M41, M44, M47

Suggested Citation

García Lara, Juan Manuel and Mora, Araceli, Balance Sheet vs. Earnings Conservatism in Europe. Available at SSRN:

Juan Manuel García Lara (Contact Author)

Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903

Araceli Mora

University of Valencia - Department of Accounting ( email )

Edificio Departamental Oriental
Avda. dels Tarongers, s/n
Valencia 46071

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