AAA Spark Meeting of Regions

Trust and Accounting Conservatism

• In Event: Era of Big Data Analytics, Trust and Accounting Conservatism

Abstract

Ethical corporate behavior and the trust required to be believable, are increasingly expressed and advertised as a priority in business. This study illuminates the relationship between trust and the strategic use of discretionary accruals as reflected in levels of accounting conservatism. I explore the tendency of trust to act as a potential substitute for accounting conservatism, for example, in the context of contracting theory and rent-seeking mitigation. However, trust may indeed have a complementary effect on levels of accounting conservatism, for example, as part of the overall corporate culture and risk aversion theory. Thus, I make no initial prediction concerning the empirical question of whether trust has a positive or negative association with levels of accounting conservatism. I examine a large sample of firm-year data using textual analysis of annual reports and for robustness, separately the MD&A section. This research significantly contributes to prior literature by first, uniquely studying the association between trust and firm-level conditional and unconditional accounting conservatism. Second, by expanding on the growing stream of textual analysis research. Third, the results of this study are useful for all stakeholders of financial reporting, including analysts, investors, regulators, and auditors.

Author

• Michelle Li-Kuehne, Whitworth University and University of Wisconsin, Whitewater