Why has Financial Reporting Become More Conservative over Time?

Abstract

Accounting conservatism has significantly increased over the last several decades, but little is known about causes for these changes. I find that the overall increase in conservatism is largely driven by a subset of young firms rather than old firms in the firm population. I then examine whether the different conservatism trends between old and young firms are due to changes in accounting standards, changes in demand for conservatism, or changes in firms economic environments. My evidence suggests that the adoption of new accounting standards is responsible for changes in conservatism as most prior studies expect, but changes in demand for conservatism driven by the passage of regulations also play an important role in explaining conservatism trends. In contrast, changes in economic environments seem to have had little effect on conservatism.