Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism

59 Pages Posted: 7 Mar 2007 Last revised: 9 Jan 2010

Mozaffar Khan

University of Minnesota - Twin Cities - Carlson School of Management

Ross L. Watts

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

Date Written: August 17, 2009

Abstract

We estimate a firm-year measure of accounting conservatism, examine its empirical properties as a metric, and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism. The results are consistent with the measure, C_Score, capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to three years ahead. Cross-sectional hypothesis tests suggest firms with longer investment cycles, higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism. Event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty.

Keywords: Conservatism, Firm-Year Measure, Properties, Information Asymmetry, Litigation

JEL Classification: M41, M44, G34, G38, K22, D82

Suggested Citation

Khan, Mozaffar and Watts, Ross L., Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism (August 17, 2009). MIT Sloan Research Paper No. 4640. Available at SSRN: https://ssrn.com/abstract=967348 or http://dx.doi.org/10.2139/ssrn.967348

Mozaffar Khan (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Ross L. Watts

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

E52-325
Cambridge, MA 02142
United States

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