In this paper I examine the relationship between systematic risk and accounting conservatism. I argue that in firms with higher systematic risk, managers have higher incentives to delay the recognition of bad news in the hope of future good news. They also face less demand for conservatism from investors and auditors. Consistent with my hypothesis, I find a significant and negative association between systematic risk and accounting conservatism, robust to various known determinants of conservatism. Results from a lead-lag test suggest that the direction of causality flows from systematic risk to conservatism, and not vice versa. Unsystematic risk, however, is not significantly related to conservatism. Furthermore, the effect of systematic risk on conservatism is likely to originate from downside systematic risk, rather than upside risk. My findings highlight the important role that systematic risk may play in shaping managers’ reporting behavior.
Ebrahimi Kordlor, A., & Shams, Z. (2015). The effect of RISK on CONSERVATISM. Accounting and Auditing Research, 7(26), 74-91. doi: 10.22034/iaar.2015.103908
MLA
Ali Ebrahimi Kordlor; Zahra Shams. "The effect of RISK on CONSERVATISM". Accounting and Auditing Research, 7, 26, 2015, 74-91. doi: 10.22034/iaar.2015.103908
HARVARD
Ebrahimi Kordlor, A., Shams, Z. (2015). 'The effect of RISK on CONSERVATISM', Accounting and Auditing Research, 7(26), pp. 74-91. doi: 10.22034/iaar.2015.103908
VANCOUVER
Ebrahimi Kordlor, A., Shams, Z. The effect of RISK on CONSERVATISM. Accounting and Auditing Research, 2015; 7(26): 74-91. doi: 10.22034/iaar.2015.103908
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