Conditional conservatism and disaggregated bad news indicators in accrual models

Conditional conservatism and disaggregated bad news indicators in accrual models Conditional conservatism is an integral but often unmodeled part of the normal accrual process. The standard economic determinants of accruals contain information about unrealized losses. We argue that accountants recognize these unrealized losses as disaggregated write-downs for small asset pools. Modeling disaggregated impairments yields new economic insights about accruals and improved accrual models. We predict that accrual conservatism manifests as a sum of asymmetries for a vector of news indicators, rather than as an asymmetry for a scalar aggregate news proxy. We argue that more detailed segment-level and quarterly indicators have an incremental effect on annual firm-level accruals. We also predict a dynamic effect of successive loss indicators because accountants look for consistent patterns in these variables. Empirical results for U.S. firms support our predictions. The asymmetries in accruals are consistent with conservatism in validation tests. We also document improved statistical power and type I error in earnings management tests. Review of Accounting Studies Springer Journals

Conditional conservatism and disaggregated bad news indicators in accrual models

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Springer US
Copyright © 2016 by Springer Science+Business Media New York
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
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