Principles-based standards and conditional accounting conservatism

Gopal V. Krishnan and Jing Zhang

Advances in accounting, 2022, vol. 58, issue C

Abstract: While the regulatory push towards principles-based standards in the United States and elsewhere is based on the notion that principles-based standards are more informative to capital market participants relative to rules-based standards, we do not know how principles-based standards impact accounting conservatism for U.S. firms. Using a measure of a firm's reliance on principles-based versus rules-based standards, we contribute to the literature by empirically examining the relation between conditional accounting conservatism and use of principles-based standards for U.S. firms. We find that conditional accounting conservatism is lower for firms relying more on principles-based standards, and this association is more pronounced for firms with greater earnings management incentives. However, the negative relation between conditional conservatism and use of principles-based standards is mitigated when there are contracting or litigation concerns. Additional analysis shows that reliance on principles-based standards also reduces unconditional accounting conservatism. Our findings are robust to using alternative measures of accounting conservatism, firm fixed effects, and a difference-in-difference model. Our evidence informs the FASB and the SEC that adoption of principles-based standards comes at a cost and has implications for regulators, auditors, analysts, investors, and others.

Keywords: Principles-based standards; Conservatism; Earnings management; Timely loss recognition (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:58:y:2022:i:c:s0882611022000268

DOI: 10.1016/j.adiac.2022.100607

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