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Estimation and empirical properties of a firm-year measure of accounting conservatism

  • Khan, Mozaffar
  • Watts, Ross L.
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    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 3 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.

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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 48 (2009)
    Issue (Month): 2-3 (December)
    Pages: 132-150

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    Handle: RePEc:eee:jaecon:v:48:y:2009:i:2-3:p:132-150
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