Seminar by Juan Manuel Garcia Lara

Palazzo Cà Borin, via del Santo 22

08.06.2016

Conditional conservatism and the limits to earnings management

Seminar by Juan Manuel Garcia Lara, Department of  Business Administration, Universidad Carlos III de Madrid

We examine the impact of conditional conservatism on earnings management. Our findings support the view that conservatism reduces accruals-based earnings management but also triggers a trade-off between accruals and real earnings management. We show that, overall, more conservative firms are less likely to either marginally or habitually beat earnings targets. Exogenous shocks (the passage of SFAS 131 and the SEC’s short-selling pilot program) provide additional support for our findings. These shocks increased reporting transparency, reducing earnings management. Conservative firms, however, were only marginally affected, consistent with conservatism already eliciting these transparency effects for them.