Estimating and validating a firm-year-specific measure of conservatism: Australian evidence

Authors: Lai, Cheng¹; Taylor, Stephen L.²

Source: Accounting and Finance, Volume 48, Number 4, December 2008 , pp. 673-695(23)

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Abstract:

We provide new evidence on the asymmetric timeliness with which economic gains and losses are recognized in Australian financial reporting (i.e. conservatism), as well as some of the factors associated with variation in conservatism. We first derive, and then estimate and subsequently validate, a firm-year-specific measure of conservatism (C_Score) in the manner suggested by Khan and Watts (2007). Our results indicate that conservatism is a pervasive feature of the Australian financial reporting environment. Conservatism is positively associated with stock return volatility, investment cycle length and prior period conservatism, and it is negatively associated with firm age, firm size and leverage. The results are an encouraging start for research into the causes and consequences of conservatism in Australian financial reporting.

Keywords: Conservatism; Timeliness; Earnings; G12; M41

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-629X.2008.00270.x

Affiliations: 1: Australian School of Business, University of New South Wales, Sydney, 2052 Australia 2: School of Accounting, University of Technology-Sydney, Broadway, 2007, Australia

Publication date: 2008-12-01