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International Differences in Conditional Conservatism: The Role of Unconditional Convservatism and Income Smoothing

Title data

Gassen, Joachim ; Fülbier, Rolf Uwe ; Sellhorn, Thorsten:
International Differences in Conditional Conservatism: The Role of Unconditional Convservatism and Income Smoothing.
2005
Event: European Accounting Association (EAA): 28th Annual Congress , 28.-20 Mai 2005 , Göteborg, Schweden.
(Conference item: Conference , Paper )

Official URL: Volltext

Abstract in another language

Prior research documents that conditional conservatism, measured as the asymmetric timeliness of earnings reflecting bad versus good news, varies with cross-country differences in institutional regimes. In this paper, we examine the determinants of conditional conservatism and related earnings attributes internationally. First, using panel data, we investigate whether competing earnings attributes such as unconditional conservatism and income smoothing affect conditional conservatism and its international differences. We find that these attributes are predictably correlated with conditional conservatism. Second, we address the question whether income smoothing and conditional conservatism are two fundamentally different earnings attributes. We show theoretically that both attributes yield different earnings distributions and that the motivations for producing earnings which possess these attributes differ. To test these predictions empirically, we calculate firm-specific time-series measures of asymmetric timeliness, using a novel trigonometric measure based on the standard Basu (1997)-type regression. Using this cross-sectional data, we test whether conditional conservatism and income smoothing are different and find them to be only weakly correlated for a broad international sample. Also, we demonstrate that income smoothing explains international differences in conditional conservatism. Finally, we estimate simple determinant models of conditional conservatism and income smoothing, showing that both earnings attributes are driven by different explanatory firm-level factors: conditional conservatism increases with the importance of debt financing, while income smoothing increases with the importance of dividends. Despite some important limitations, we believe our results to be meaningful because they show that cross-country differences in conditional conservatism are influenced by the effects of other accounting properties, predominantly income smoothing. Especially, legal regime appears to drive income smoothing while losing its explanatory power for conditional conservatism when firm-specific factors are controlled for.

Further data

Item Type: Conference item (Paper)
Refereed: Yes
Additional notes: SSRN-id894254
Keywords: conservatism; income smoothing; contracting; earnings timeliness; market-to-book ratio; earnings attributes
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Business Administration > Chair Business Administration X
Faculties > Faculty of Law, Business and Economics > Department of Business Administration > Chair Business Administration X > Chair Business Administration X - Univ.-Prof. Dr. Rolf Uwe Fülbier
Faculties
Faculties > Faculty of Law, Business and Economics
Faculties > Faculty of Law, Business and Economics > Department of Business Administration
Result of work at the UBT: No
DDC Subjects: 300 Social sciences > 330 Economics
Date Deposited: 08 Jan 2015 13:51
Last Modified: 13 Apr 2015 09:40
URI: https://eref.uni-bayreuth.de/id/eprint/5419