Conservatism and Endogenous Preferences

• In Event: 4.02 Financial Analyst and Investor Reaction

Abstract

Literature suggests that individuals have endogenous preferences for accounting conservatism due to intrinsic loss aversion. This paper provides first experimental evidence for this claim. Conservatism avoids disappointment by anticipating possible future losses. Our findings suggest that in a judgment context based on innate loss aversion, individuals value conservatism more highly than neutrality in accounting, indicating a higher willingness to invest in economically valuable ventures. We further provide evidence that individuals also show explicit preferences for conservative vs. neutral accounting in a choice setting. The study contributes to the ongoing discussion on accounting conservatism by establishing that conservative accounting helps individuals mentally process unsuccessful events and avoid disappointment.

Authors

• Wolfgang Schultze, Universität Augsburg

• Tami Dinh, University of St Gallen

• Christina Manthei-Geh, University of Augsburg