AAA Spark Meeting of the Regions

The Implications of Accounting Conservatism for Income Adjustments during Economic Downturns

• In Event: DSFI - Session 3 (Experimental)

Abstract

Using four prior economic cycles, especially economic downturns, as exogenous shocks, we examine the effects of accounting conservatism on income adjustments made by firms in annual financial reporting following the onset of economic crises. We predict and find that firms with more conservative accounting practices during the economically stable period are associated with relatively less income decreasing accounting adjustments during crisis period, compared to firms with less conservative accounting. We also report that firms with conservative accounting are likely to have better financial performance suggesting that those firms are prudently prepared for future economic uncertainty. Our findings are consistent with the constraint hypothesis (Beaver and Ryan, 2005; Sunder et al. 2018)—which argues that past conservatism reduces the carrying value of assets on balance sheet which constrains future conditionally conservative write-downs.

Authors

• Suzanne Mullinnix, AAMVA

• Evans Adu, FLORIDA INTERNATIONAL UNIVERSITY