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Accounting disclosures, accounting quality and conditional and unconditional conservatism

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  • Iatridis, George Emmanuel
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    Abstract

    This study investigates the motives of UK listed companies when reporting high and low quality accounting disclosures. It also examines the relation between the quality of published financial statements and earnings management practises, for example, low quality accounting disclosures might be linked to earnings management. The paper further studies the relation between financial reporting quality and the timely disclosure of losses and difficult-to-verify accounting items, i.e. conservatism. The focus here is on conditional and unconditional conservatism, their association and the variables that influence the asymmetric disclosure of losses. The findings indicate that firms that display high quality accounting disclosures generally exhibit higher size, profitability and liquidity measures. Firms that experience a change in management or are audited by a Big-4 auditor also tend to report high quality disclosures. High quality disclosers tend to display higher capital needs and to engage less in earnings management. The study shows that they display greater conditional conservatism and less unconditional conservatism. The findings demonstrate that the conditional form of conservatism is negatively related to unconditional conservatism, as the former tends to enhance contracting efficiency, while the latter might facilitate managerial opportunism. The study provides evidence of asymmetric disclosure of losses for firms with high leverage. The same holds for high quality disclosers that display bad news. In contrast, firms that are in a growth phase are found to provide less conservative and less difficult-to-verify accounting information in order to influence their growth prospects.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 20 (2011)
    Issue (Month): 2 (April)
    Pages: 88-102

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    Handle: RePEc:eee:finana:v:20:y:2011:i:2:p:88-102

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Accounting disclosures Accounting quality Conditional conservatism Unconditional conservatism Managerial opportunism Earnings management;

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    Cited by:
    1. Ntim, Collins G. & Lindop, Sarah & Thomas, Dennis A., 2013. "Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre- and post-2007/2008 global financial crisis periods," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 363-383.
    2. Dariush Foroghi & Hadi Amiri & Zahra Nokhbeh Fallah, 2013. "Corporate Governance and Conservatism," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 61-71, October.
    3. Mouselli, Sulaiman & Jaafar, Aziz & Goddard, John, 2013. "Accruals quality, stock returns and asset pricing: Evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 203-213.

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