A Proposal for Research on Conservatism

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