Accounting Conservatism and the Limits to Earnings Management

Accounting

Speaker:Beatrix Garcia, Madrid University
Date: Wednesday 27 March 2013
Time: 14:00 - 15:30
Location: Bateman Lecture Theatre

Further details

An untested common assumption in prior literature is that conservatism reduces accruals-based earnings management. We test this prediction and also, whether by imposing limits to accruals manipulation, there is a downside to conservatism in the form of increases in real earnings management. If the incentives to engage in earnings management stay constant, it is likely that when managers face constraints to manipulate accruals, they may shift to potentially more costly real earnings management practices (Ewert and Wagenhofer 2005, Zang 2012). Using a large US sample for the period 1991-2010 we find a negative association between conservatism and measures of accruals manipulation, and a positive association between conservatism and real earnings management. However, our evidence is consistent with only a moderate displacement effect and with conservatism constraining earnings management overall.