Research article

Impact of firm-level uncertainty on earnings management and role of accounting conservatism

  • Received: 25 October 2019 Accepted: 24 December 2019 Published: 26 December 2019
  • JEL Codes: D81, M41, M49

  • This study investigates whether accounting conservatism can reduce earnings management in the wake of uncertainty. It is hypothesized that conservative reporting during uncertainty can reduce earnings management and increase firm value. Using 5354 firm-year observations from 2005-2018 through Khan and watts model, we provide evidence that accounting conservatism is a way to put limits on earnings management for firms facing uncertainty. We find a statistically significant impact of conservative reporting on firm value during an uncertainty. Uncertainty at the firm level is measured by applying "prospector" and "defender" business strategy. To measure earnings management Modified Jones model and Dechow and Dichev approach models applied. Our results provide insights into conservative accounting and have critical and practical implications for investors, researchers and standard setters. After addressing endogeneity and applying GMM estimator, our results remain confirmed.

    Citation: Abdul Haque, Huma Fatima, Ammar Abid, Muhammad Ali Jibran Qamar. Impact of firm-level uncertainty on earnings management and role of accounting conservatism[J]. Quantitative Finance and Economics, 2019, 3(4): 772-794. doi: 10.3934/QFE.2019.4.772

    Related Papers:

  • This study investigates whether accounting conservatism can reduce earnings management in the wake of uncertainty. It is hypothesized that conservative reporting during uncertainty can reduce earnings management and increase firm value. Using 5354 firm-year observations from 2005-2018 through Khan and watts model, we provide evidence that accounting conservatism is a way to put limits on earnings management for firms facing uncertainty. We find a statistically significant impact of conservative reporting on firm value during an uncertainty. Uncertainty at the firm level is measured by applying "prospector" and "defender" business strategy. To measure earnings management Modified Jones model and Dechow and Dichev approach models applied. Our results provide insights into conservative accounting and have critical and practical implications for investors, researchers and standard setters. After addressing endogeneity and applying GMM estimator, our results remain confirmed.


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