Accounting Conservatism as a Social Norm

• In Event: Conservatism and Activism

Abstract

We conduct an experiment which pairs senders (providers of information) and receivers (users of information) in a setting characterized by information asymmetry, measurement uncertainty, and misaligned incentives that motivate senders to report aggressively. Each period receivers evaluate reporting errors and rank each sender in order of preference, which determines the next period’s pairings. We posit that receivers perceive a social norm to apply – an informal rule prohibiting aggressive reporting – and use noisy reporting errors to gauge senders’ compliance. Consistent with this expectation we find that, ceteris paribus, receivers disprefer senders producing (i) a large overstatement error than understatement error of equal magnitude and (ii) an incremental overstatement error than incremental understatement error. These asymmetric revealed preferences are both inconsistent with strategic self-interested behavior and cannot be explained by loss aversion. Alternatively, when senders’ motives are aligned with receivers’, we find no asymmetry in receivers’ revealed preferences over reporting errors. While our evidence is indirect, our findings open the possibility that accounting conservatism emerged as a social norm – an informal bonding cost, borne by the sender – that serves to enhance trust and cooperation among economic agents. We believe this insight can open new possibilities for conservatism research.

Authors

• Jivas Chakravarthy, University of Texas-Arlington

• Timothy W Shields, Chapman University