A Proposal for Research on Conservatism

24 Pages Posted: 15 Mar 2001

See all articles by Ross L. Watts

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Abstract

In this paper I propose explanations for conservatism in accounting and empirical tests of those explanations. Conservatism is defined as the degree to which profits are anticipated. The concept is hypothesized to have evolved from accounting's contracting role and to have been reinforced and influenced by regulation and increased legal liability. Avoidance of inappropriate distributions to claim holders appears to have been an important contracting reason for conservatism. Testable predictions for cross- sectional variation in conservatism are generated. Empirical tests for discriminating between contracting and regulatory influences are also proposed.

JEL Classification: G00

Suggested Citation

Watts, Ross L., A Proposal for Research on Conservatism. Simon School of Business Working Paper FR 93-13. Available at SSRN: https://ssrn.com/abstract=6044 or http://dx.doi.org/10.2139/ssrn.6044

Ross L. Watts (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

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