A Proposal For Research On Conservatism
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Simon School of Business Working Paper FR 93-13
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.
Number of Pages in PDF File: 24
JEL Classification: G00
Date posted: March 15, 2001