Economics at your fingertips  

Accounting conservatism, business strategy, and ambiguity

Chia-Chun Hsieh, Zhiming Ma and Kirill E. Novoselov

Accounting, Organizations and Society, 2019, vol. 74, issue C, 41-55

Abstract: We investigate whether accounting conservatism can be explained as a rational response to ambiguity. Decision analysis shows that decision rules that work well under ambiguity put greater weight on negative than on positive outcomes, i.e., exhibit caution. Accounting conservatism increases the timeliness of bad news that is more relevant under cautious decision rules and thereby helps corporate managers and investors implement them. We, therefore, hypothesize that firms facing greater ambiguity report more conservatively. We adopt two different measures to proxy for the firm-specific level of ambiguity. First, we identify firms pursuing the “prospector” versus “defender” business strategies. Compared with defenders, who focus on utilizing existing resources, prospectors actively create their future by seeking new business opportunities and thus face greater ambiguity. Second, we conduct an additional set of tests based on environmental scanning, which reduces ambiguity. Both sets of results suggest that firms facing greater ambiguity report more conservatively.

Keywords: Ambiguity; Uncertainty; Caution; Prudence; Accounting conservatism (search for similar items in EconPapers)
JEL-codes: D81 G32 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Accounting, Organizations and Society is currently edited by Christopher Chapman

More articles in Accounting, Organizations and Society from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-08-10
Handle: RePEc:eee:aosoci:v:74:y:2019:i:c:p:41-55