Conservative Accounting Choices

Management Science, Forthcoming

Posted: 4 Jan 2005

Multiple version iconThere are 2 versions of this paper

Abstract

Managers have sufficient discretion under Generally Accepted Accounting Principles (GAAP) to adopt more or less conservative financial reporting policies. In this paper, we develop a signaling model to provide insight into managers' decisions to be conservative in their accounting. We provide conditions under which the market can use the manager's exercise of discretion to infer her private information about the future prospects of the firm and thus firm value. Under these conditions, we also show that there are meaningful differences between earnings response coefficients for firms whose managers choose a conservative reporting policy and those whose managers do not. Finally, we use our theoretical model to provide intuition for some established empirical results on earnings response coefficients.

Keywords: Conservative accounting, earnings, asymmetric information, signaling, analyst forecasts, analyst forecast errors

JEL Classification: C72, D82, G12, M41, M44

Suggested Citation

Bagnoli, Mark E. and Watts, Susan G., Conservative Accounting Choices. Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=642042

Mark E. Bagnoli

Purdue University ( email )

Department of Accounting
West Lafayette, IN 47907-1310
United States
765-494-4484 (Phone)
765-496-1778 (Fax)

Susan G. Watts (Contact Author)

Purdue University ( email )

Department of Accounting
West Lafayette, IN 47907-1310
United States
765-494-4504 (Phone)
765-496-1778 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,699
PlumX Metrics