Accounting choices and firm-specific conservatism measures

Date of Completion

January 2004


Business Administration, Accounting




In the first chapter, this study develops a new firm-level conservatism measure from the Basu (1997) model and then examines the consistency and validity of the new conservatism measure and two extant firm-level conservatism measures, Beaver and Ryan's (2000) and accruals-based approaches. Because Basu's (1997) and Beaver and Ryan's (2000) market-based conservatism measures represent conservatism measures from an income statement and balance sheet perspective, respectively, I further suggest two reasons that may cause the two measures capture different aspects of conservatism, i.e., different contracting roles of the two financial statements and different time period inherent in the two statements' preparation. ^ In the second chapter, this study investigates whether firm-specific accounting conservatism is positively related to the market valuation of accounting information presented in the income statement and/or balance sheet. I test whether conservatism is valued by the market, using three alternative firm-specific conservatism measures. In each market and accounting data regression, I include a firm-specific conservatism variable and interactions between the firm-specific conservatism variable and accounting variables. The results show that the market assigns higher value to the conservatively reported balance sheet information but not income statement information. Moreover, I find that conservatism does not improve the return-earnings relation because conservatism makes earnings less timely and predictable when accounting conservatism is measured from income statement perspective, i.e., accruals and modified Basu (1997) approaches. I do not find the same impact of conservatism on earnings when the balance sheet conservatism measure is employed. ^