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The economic determinants of conditional conservatism

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Author Info

  • García Lara, Juan Manuel
  • García Osma, Beatriz
  • Penalva, Fernando

Abstract

We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognized otherwise, or by delaying the recognition of current economic gains that would have been recognized had circumstances been different.

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Bibliographic Info

Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/7423.

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Length: 374 p.
Date of creation: Apr 2009
Date of revision:
Publication status: Published in Journal of Business Finance and Accounting (2009-04) v.v. 36, p.336-372
Handle: RePEc:ner:carlos:info:hdl:10016/7423

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Web page: http://www.uc3m.es

Related research

Keywords: Conservatism; Contracting; Taxation; Political costs; Litigation risk;

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References

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  1. Mihir Desai & Dhammika Dharmapala, . "Corporate Tax Avoidance and High Powered Incentives," American Law & Economics Association Annual Meetings 1006, American Law & Economics Association.
  2. Myron S. Scholes & G. Peter Wilson & Mark A. Wolfson, 1992. "Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986," NBER Working Papers 4171, National Bureau of Economic Research, Inc.
  3. García Lara, Juan Manuel & García Osma, Beatriz & Mora, Araceli, 2005. "The effect of earnings management on the asymmetric timeliness of earnings," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/7633, Universidad Carlos III de Madrid.
  4. K.J. Martijn Cremers & Vinay B. Nair, 2003. "Governance Mechanisms and Equity Prices," Yale School of Management Working Papers ysm376, Yale School of Management.
  5. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  6. Joachim Gassen & Rolf Uwe Fulbier & Thorsten Sellhorn, 2006. "International Differences in Conditional Conservatism - The Role of Unconditional Conservatism and Income Smoothing," European Accounting Review, Taylor and Francis Journals, vol. 15(4), pages 527-564.
  7. Juan Manuel Garcia Lara & Beatriz Garcia Osma & Fernando Penalva, 2007. "Board of Directors' Characteristics and Conditional Accounting Conservatism: Spanish Evidence," European Accounting Review, Taylor and Francis Journals, vol. 16(4), pages 727-755.
  8. Ivana Raonic & Stuart McLeay & Ioannis Asimakopoulos, 2004. "The Timeliness of Income Recognition by European Companies: An Analysis of Institutional and Market Complexity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1-2), pages 115-148.
  9. Douglas A. Shackelford & Joel Slemrod & James M. Sallee, 2007. "A Unifying Model of How the Tax System and Generally Accepted Accounting Principles Affect Corporate Behavior," NBER Working Papers 12873, National Bureau of Economic Research, Inc.
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Cited by:
  1. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2010. "Conditional conservatism and cost of capital," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/7422, Universidad Carlos III de Madrid.

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