Estimating and validating a firm-year-specific measure of conservatism: Australian evidence

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Journal Article
Accounting and Finance, 2008, 48 (4), pp. 673 - 695
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We provide new evidence on the asymmetric timeliness with which economic gains and losses are recognized in Australian financial reporting (i.e. conservatism), as well as some of the factors associated with variation in conservatism. We first derive, and then estimate and subsequently validate, a firm-year-specific measure of conservatism (C_Score) in the manner suggested by Khan and Watts (2007). 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. © 2008 The Authors.
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