Validating a firm-year-specific measure of conservatism

Abstract

The evidence on the asymmetric timeliness with which economic gains and losses are recognized in financial reporting (i.e. conservatism), as well as some of the factors associated with variation in conservatism. 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.