Accounting and Control

Conditional conservatism and the limits to earnings management

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We examine the impact of conditional conservatism on earnings management. Our findings support the view that conditional conservatism reduces accruals-based earnings management but also triggers a trade-off between accruals and real earnings management. In our main tests we use the passage of SFAS 121 as a plausibly exogenous regulatory change that increased the level of conditional conservatism but did not materially affect earnings management. We find that, after the regulation, treated firms reduce accruals-based earnings management and increase real earnings management, and are less likely to be marginal or habitual beaters of earnings benchmarks. Given the crucial role of earnings for firm valuation and analysis, and that conditionally conservative accounting choices are observable, our results should be of wide interest for investment professionals.
Bibliographic citation: GARCÍA LARA, J., GARCÍA OSMA, B., PEÑALVA, F. (2020). Conditional conservatism and the limits to earnings management. Journal of Accounting and Public Policy, 39 (4). doi:

Reference: (DOI)
Date: 01/06/2020
Author(s): J.M. García Lara; B. García Osma; Fernando Peñalva
Document type: Article in Journal (refereed)
Department: Accounting and Control
Languages: English