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The Economic Determinants of Conditional Conservatism

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

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. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

Suggested Citation

  • Juan Manuel García Lara & Beatriz García Osma & Fernando Penalva, 2009. "The Economic Determinants of Conditional Conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 336-372.
  • Handle: RePEc:bla:jbfnac:v:36:y:2009-04:i:3-4:p:336-372
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    References listed on IDEAS

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    Cited by:

    1. Lawrence, Alastair & Sloan, Richard & Sun, Yuan, 2013. "Non-discretionary conservatism: Evidence and implications," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 112-133.

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