Non-Discretionary Conservatism: Evidence and Implications

Abstract

A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices. We extend existing research by modeling the impact of extant accounting rules on conservative accounting. Accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values. We document evidence of the resulting non-discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives.

Keywords: Non-discretionary conservatism, conditional conservatism, book-to-market, asset impairment.

JEL Classification: M41, C23, D21, G32