Rising Conservatism: Implications for Financial Analysis

Dan Givoly, Carla Hayn

Research output: Contribution to journalArticle

19 Scopus citations

Abstract

We provide evidence that is consistent with an increase in reporting conservatism by U.S. companies in the past few decades. Using a constant sample of almost 900 companies, we examined several measures of accounting conservatism, including the level and rate of accumulation over time of negative nonoperating accruals, the differential timeliness of incorporating good news versus bad news in reported earnings, the skewness and variability of the earnings distribution relative to the cash flows distribution, and changes in the market-to-book ratio. The increased conservatism has contributed to a persistent and prevalent decline in reported profitability, an increase in the incidence of losses, and an increase in the dispersion of earnings. Increased conservatism affects financial ratios and P/E multiples. Thus, incorporating information on the level of a company's reporting conservatism improves valuations and the yield to investment strategies that are based on these ratios.

Original languageEnglish (US)
Pages (from-to)56-74
Number of pages19
JournalFinancial Analysts Journal
Volume58
Issue number1
DOIs
StatePublished - Jan 1 2002

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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