Bank accounting conservatism and bank loan pricing

This paper studies the effects of bank accounting conservatism on the pricing of syndicated bank loans. We provide evidence that banks timelier in loss recognition charge higher spreads. We go onto consider what happens to the relationship between spreads and timeliness in loss recognition during the financial crisis. During the crisis, banks timelier in loss recognition increase their spreads to a lesser extent than banks less timely in loss recognition. These findings are broadly consistent with the argument that conditional accounting conservatism serves a governance role. The policy implication is that banks timelier in loss recognition exhibit more prudent and less pro-cyclical loan pricing behaviour.     

Share repurchases and accounting conservatism

Review of Quantitative Finance and Accounting - The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address...     

Institutional ownership composition and accounting conservatism

This study empirically investigates the association between institutional ownership composition and accounting conservatism. Transient (dedicated) institutional investors, holding diversified (concentrated) portfolios with high (low) portfolio turnover, focus on portfolio firms’ short-term (long-term) perspectives and trade heavily (generally do not trade) on current earnings news. Thus, I predict that as transient (dedicated) institutional ownership increases, firms will exhibit a lower (higher) degree of accounting conservatism. Consistent with my predictions, in the context of asymmetric timeliness of earnings, I document that as the level of transient (dedicated) institutional ownership increases, earnings become less (more) asymmetrically timely in recognizing bad news.     

Managerial risk incentives and accounting conservatism

Review of Quantitative Finance and Accounting - We provide empirical evidence of the effect of managerial risk incentives on financial reporting conservatism. We hypothesize that firms use greater...     

The quality and conservatism of the accounting earnings of local governments

Our aim is to provide insight into the usefulness of accounting earnings for measuring the economic performance of local governments across Australia. Specifically, we explore whether (i) accrual accounting provides useful information, and (ii) earnings of local governments are conservative. We find that accrual accounting by local governments provides useful information as measured by the ability to predict one-year-ahead operating cash-flows. We find no conservatism in the financial reports of the average local government. This, we posit, is due to a lower level of demand for high-quality accrual-based financial reports from these entities. Consistent with this argument, both the quality of accruals and the degree of conservatism increase for local governments for which we predict a demand for higher-quality financial reporting.     

Asymmetric timeliness tests of accounting conservatism

Recent accounting research employs an asymmetric timeliness measure to test the hypothesis that reported accounting earnings are “conservative.” This research design regresses earnings on stock returns to examine whether “bad” news is incorporated into earnings on a more timely basis than “good” news. We identify properties of the asymmetric timeliness estimation procedure that will result in biases in the test statistics except under very restrictive conditions that are rarely met in typical empirical settings. Using data series that are devoid of asymmetric timeliness in reported earnings, we show how these biases result in evidence consistent with conservatism. We conclude that the biased test statistics inherent in the asymmetric timeliness research design preclude using this method to measure conservatism; that these biases are irresolvable as they originate in the test’s specification; and that studies employing asymmetric timeliness tests cannot be interpreted as providing evidence of conservatism.

The role of accounting conservatism in management forecast bias

We investigate whether management earnings forecasts fully incorporate information in historical accounting conservatism. We find that management earnings forecasts are more optimistic for firms with greater accounting conservatism in the previous year. We further examine whether this conservatism-related optimistic bias in management earnings forecasts varies with managers’ difficulty predicting earnings accurately, managers’ opportunistic incentives, and the firms’ litigation risk. We find that the negative association between management forecast errors and conservatism increases, to various extent, with the firms’ operating cycles, earnings volatility, and the width of forecast range but does not change with proxies for opportunistic incentives or litigation risk. These results suggest that forecast difficulty is the primary reason for managers’ failure to incorporate conservatism fully in their earnings forecasts.     

The reform of accounting standards and audit pricing

This paper focuses on the reform of accounting standards in China in 2007 and investigates its impact on equilibrium pricing in the audit market. We find that the concentration of the audit market and the probability of issuing modified audit opinions do not significantly change, but that audit fees increase significantly after the adoption of the new accounting standards in China. Deeper analysis suggests that (1) the implementation of the new IFRS-based Chinese Accounting Standards (CASs) has increased the market risk faced by listed firms and thus auditors’ expected audit risk, causing an increase in audit fees, and (2) the degree of the increase in audit fees is positively related to the adjusted difference between net income according to the old CAS before 2007 and the new CAS after 2007. We thus conclude that the reform has had a significant impact on audit pricing in China.     

Monetary policy,accounting conservatism and trade credit

Using a sample of A-share listed firms in China during the 2003–2012 period,this paper investigates the effect of accounting conservatism on trade credit,taking...     

Analyst forecast,accounting conservatism and the related valuation implications

This study investigates whether financial analysts incorporate accounting conservatism into their earnings forecasts and whether it is more difficult for them to forecast earnings for less conservative firms, and then examines the impact of the findings on the return predictability of the value‐to‐price (V/P) ratio. After controlling for the other factors affecting forecast accuracy, such as earnings predictability and information uncertainty, I find that analysts incorporate accounting conservatism into their earnings forecasts and that forecasting earnings is more difficult for less conservative firms. Consequently, the return predictability of the V/P ratio is stronger for more conservative firms, and previously reported return predictability of the V/P ratio is an average across firms with differing levels of conservatism.     

Mark-to-market accounting and liquidity pricing

When liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions’ solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks’ assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.     

New development: The protective role of conservatism in public sector accounting

This article picks up a discussion in international business accounting about the appropriate definition and use of conservatism (or prudence) and calls for a similar discussion in public sector accounting. If financial reports present an overly optimistic situation, politicians might use them to justify spending public money that is not there, risking the sustainability of services and ‘borrowing’ from future generations.     

Audit results,market reactions and accounting conservatism: evidence from China

This paper examines China's securities market reactions to publication of the audits of state-owned companies. The impact of audit reports on accounting conservatism is also discussed. Recommendations are made for improving the current system.     

基层央行会计业务对账系统的设计与实现

目前,中国人民银行（以下简称“央行”）会计营业部门与开户单位实行手工按月（句）对账制度,即央行按月（旬）向开户单位发送对账单,由开户单位填列余额和未达账项并加盖预留印鉴后于次月15日前返还央行。这种对账方式具有对账工作量大、对账间隔周期长、账务核对处理不及时的缺陷,差错从发生到发现时间间隔最长可达45天。     

会计计量和报告的改进

随着市场竞争的日趋激烈,企业围绕着增强综合竞争实力而在研究开发(R&D)、人力资源(HR)、市场和组织管理等方面不断增加的投资(这里不妨称之为发展性投资),使目前以货币计量的会计账面价值距离企业的真实价值越来越远.本文建议将会计的计量和报告多元化,即补充增加非货币因素,以充分发挥会计的信息传递作用,提高会计这一信息媒介在信息社会的竞争力.     

Evidence on the role of accounting conservatism in monitoring managers’ investment decisions

Watts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers’ investment decisions. We hypothesize that if conservatism reduces managers’ex ante incentives to take on negative net present value projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting.     

The effect of differential accounting conservatism on the “over-valuation” of high-tech firms relative to low-tech firms

This paper examines systematic differences in the level of accounting conservatism between high-tech and low-tech firms. Relying on the recent development in theoretical models and empirical measures of conservatism, we investigate conservative accounting practices and earnings management behavior in high-tech and low-tech firms. The results based on comparisons of cumulative nonoperating accruals, regression coefficients from the income timeliness models in Basu (1997), the distribution of earnings, and discretionary accruals between the two groups are consistent with a higher level of accounting conservatism in high-tech firms vis-à-vis low-tech firms. Additional analyses show that the effect of conservatism cannot be used as a defense for the over-valuation of high-tech firms.     

Foreign institutional ownership and demand for accounting conservatism: evidence from an emerging market

Review of Quantitative Finance and Accounting - This paper investigates the ‘price–concentration’ relationship in pricing syndicated loans. By measuring bank concentration at a...     

DRG-based prospective pricing and case-mix accounting—Exploring the mechanisms of successful implementation

Escalating health care expenditures have brought on the need for restructuring health care delivery. A common response to this problem has been to seek market-based solutions. In the literature, however, increasing concern has been expressed that hospital management reforms will fail or will have only a limited impact. This longitudinal case study extends our understanding of the effects of implementing DRG-based prospective pricing and case-mix accounting systems for hospital management control in a specific health care setting. Moreover, this study contributes to current knowledge by focusing on the mechanisms explaining successful implementation of new accounting and control systems in the health care sector. A deep understanding of these mechanisms may help us to design better management control systems, and thus circumvent problems in implementing these systems. Our study suggests that successful implementation in the studied context is strongly dependent on the involvement of clinicians in this process. Integrated clinical and financial accountability, assigning responsibility for implementation to clinicians, freedom in choosing appropriate control tools, and flexibility in adoption all facilitated implementation. Furthermore, we argue that this process has also been advanced by the gradual implementation of these reforms and intensifying institutional pressures.