Conditional Conservatism and the Value Relevance of Accounting Earnings: An International Study

William Brown, Karen Teitel () and Haihong He ()
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William Brown: Syracuse University
Karen Teitel: Department of Economics, College of the Holy Cross
Haihong He: California State University

No 612, Working Papers from College of the Holy Cross, Department of Economics

Abstract: Using a sample consisting of firms from 20 countries, we investigate whether conditional conservatism affects the value relevance of accounting earnings. We find that the association of conditional conservatism with the value relevance of accounting earnings depends on the country-specific level of accrual intensity. That is, in countries with higher accrual intensity, conditional conservatism is positively associated with the value relevance of earnings. We find that this effect is incremental to that of shareholder protection on the value relevance of accounting earnings documented in Hung (Journal of Accounting and Economics, 30, pp. 401–420, 2001). The results are consistent with conditional conservatism serving as an efficient contracting role to reduce managers' opportunistic behavior in the use of accruals. However, our results also indicate that the benefits of conditional conservatism are contextual and are lost in countries with lower accrual intensity.

Keywords: Accounting; Earnings (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2007-12
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Published in European Accounting Review, Volume 15, Number 4, 2006, Pages 605-626.

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