This paper empirically tests the relation between a firmâ€™s degree of accounting conservatism and its level of operating risk. This paper constitutes the first empirical study in the accounting literature to test the risk signaling theory of accounting conservatism which is recently proposed by Wang, O hOgartaigh and van Zijl (2010), who argue that a firm optimally selects a degree of accounting conservatism in order to signal its own operating risk to the capital market. Consistent with the signaling theory, this paper reports empirical evidence that US firms with a lower level of operating risk are more likely to adopt a higher level of accounting conservatism than are firms with a higher level of operating risk. This finding indicates that a signaling separating equilibrium indeed exists in the capital market, where firms use accounting conservatism as a signaling device. The findings of this paper highlights the important economic role that accounting conservatism plays in reducing the capital marketâ€™s information asymmetry with regard to the firmâ€™s operating risk

Wang, Richard Zhe

This paper empirically tests the relation between a firmâ€™s degree of accounting conservatism and its level of operating risk. This paper constitutes the first empirical study in the accounting literature to test the risk signaling theory of accounting conservatism which is recently proposed by Wang, O hOgartaigh and van Zijl (2010), who argue that a firm optimally selects a degree of accounting conservatism in order to signal its own operating risk to the capital market. Consistent with the signaling theory, this paper reports empirical evidence that US firms with a lower level of operating risk are more likely to adopt a higher level of accounting conservatism than are firms with a higher level of operating risk. This finding indicates that a signaling separating equilibrium indeed exists in the capital market, where firms use accounting conservatism as a signaling device. The findings of this paper highlights the important economic role that accounting conservatism plays in reducing the capital marketâ€™s information asymmetry with regard to the firmâ€™s operating risk

Richard Zhe Wang

The International Journal of Business and Finance Research, 2013, vol. 7, issue 1, 55-68

Keywords: Accounting Conservatism; Asymmetric Timeliness of Earnings; Basu Measure; Risk; Asset Volatility (search for similar items in EconPapers)
JEL-codes: G14 M40 M41 (search for similar items in EconPapers)
Date: 2013
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