Table 5 presents the test result of H2. The result of regression with the book value to market value ratio as the dependent variable is also consistent with the H2. The negative coefficients of β1, -0.102 (P= 0.048) and β2, -0.122 (P=0.055) indicates that the conservative report in the stagnant is more significant than other stages. Furthermore, β2 is smaller than β1 and it shows that the conservatism increases as firm goes into the maturity and stagnant stage. As for the control variables, the negative coefficients β3, -1.947 (P=0.000)and β4,
-1.873 (P=0.001) suggests that ROA (proxy for profitability) and ROA STD are negative significantly related to the conservatism. It suggests that the more profitable firms are capable of adopting conservative accounting methods. And the firm with more operating uncertainty will adopt more conservative accounting reports. These results are consistent with the Ahmed et al. (2002). However the positive coefficients β5, 0.230 (P=0.000) suggest that the effect of firm size on the conservatism is negative. The result is inconsistent with the previous finding. Finally, the leverage is also not significantly related to the conservatism.
Discussion and Conclusion
The study provides the evidence in Taiwan that the accounting conservatism actually exits in the past fifteen years, and the degree of conservatism varies in different firm life stage. Three proxies for conservatism are used and the results indicate that the pattern of accounting conservatism is increasing over time. Besides, we also present evidence that the conservatism degree arise as the firm goes into maturity and stagnant stage. These findings have implications for the regulator, financial analysts, investors and other statement users.
It also contributes to the accounting researchers in existing literature about accounting conservatism (Especially in Taiwan)…
Reference
Ahmed, A.S., B. K. Billings, R.M. Morton, and M. Stanford-Harris. 2002. The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs. The Accounting Review October, 77(4): 867-890.
Anthony, R., and K. Ramesh. 1992. Association between accounting performance measures and stock prices: A test of the life cycle hypothesis. Journal of Accounting and Economics 15: 203-227.
Ball, R., S.P. Kothari, and A. Robin. 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics 29(1): 1-51.
Basu, S. 1997. The conservatism principle and the asymmetric timeliness and earnings.
Journal of Accounting and Economics 24(1): 3-37.
Beaver, W., and S. Ryan. 2000. Biases and lags in book value and their effects on the ability of the book-to-market ratio to predict book return on equity. Journal of Accounting Research 38(1): 127-148.
Black, Ervin. L. 1998. Life-cycle impacts on the incremental value-relevance of earnings and cash flow measures. Journal of Financial Statement Analysis, 4(1):40-56.
Chung, R., M. Firth, and Jeong-Bon Kim. 2003. Auditor conservatism and reported earnings.
Accounting conservatism and reported earnings, 33(1):19-32.
Collins, D.W., E.L. Maydew, and I.S. Weiss. 1997. Changes in the value relevance of earnings and book values over the past forty years. Journal of Accounting and Economics 24:
39-67.
DeFond, M. L., and C. W. Park. 1997. Smoothing income in anticipation of future earnings.
Journal of Accounting and economics, 23(2):115-139.
Devine, C. 1963. The rule of conservatism reexamined. Journal of Accounting Research 1(2):
127-138.
Feltham, G., and J. Ohlson. 1995. Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research 11: 689-731.
French, K., and J.M. Poterba. 1991. Were Japanese stock prices too high? Journal of Financial Economics 29: 337-363.
Givoly, D., and C. Hayn. 2000. The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting and Economics 29(3): 287-320.
Hayn, C. 1995. The information content of losses. Journal of Accounting and Economics 20:
125-154.
Hendriksen, E., and M. Van Breda. 1992. Accounting Theory 5th edition. Homewood, IL:
Irwin.
Holthausen, R., and R. Watts. 2001. The relevance of value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31(1): 3-75.
Hong, K.P., M. Wu, and H. Xie. 2002. Accounting conservatism: A life cycle perspective.
Working Paper University of Illinois at Urbana-Champaign.
Karnani, A. 1984. The value of market share and the product life cycle-A game-theoretical model. Management Science 30: 696-712.
Kasznik, R., and B. Lev. 1995. To warn or not to warn. The Accounting Review 10: 113-134.
Kothari, S.P., T. Lys, C.S. Smith, and R.L. Watts. 1988. Auditor liability and information disclosure. Journal of Accounting Auditing and Finance 4: 307-339.
Krishnan, J., and J. Krishnan. 1997. Litigation risk and auditor resignations. The Accounting Review 72: 539-560.
Kwon, Y.K., D.P. Newman, and Y.S. Suh. 2001. The demand for accounting conservatism for management control. Review of Accounting Studies March 6(1): 29-52.
Muller, K., III, and E. Riedl. 2001. Using stock returns to determine bad versus good news to examine conservatism of accounting earnings. Working paper, Pennsylvania State University.
Penman, S.H., and X. Zhang. 2002. Accounting conservatism, the quality of earnings, and stock returns. The Accounting Review April, 77(2): 237-264.
Pope, P., and M. Walker. 1999. International differences in timeliness, conservatism and classification of earnings. Journal of Accounting Research 37(Suppl.): 53-99.
Porter, M.E. 1980. Competitive strategy: techniques for analyzing industries and competitors.
Free Press, New York.
Shackelford, D. A., and T. Shevlin. 2001. Empirical tax research in accounting. Journal of Accounting and Economics, 31(September):321-387.
Shon, J. 2000. Implications of conservative accounting choice on the asymmetric timeliness of earnings. Working paper, University of Chicago.
Skinner, D.J. 1994. Why firms voluntarily disclose bad news. Journal of Accounting Research 32: 38-60.
Skinner, D.J. 1997. Earnings disclosures and stockholder lawsuits. Journal of Accounting and Economics 23: 249-282.
Smith, C. W., and R. L. Watts. 1992. The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3):263-292.
Speidel, S.L., and V.B. Bavishi. 1992. GAAP arbitrage: valuation opportunities in international accounting standards. Financial Analysts Journal Nov./Dec.: 58-66.
Spence, A.M. 1977. Entry, capacity, investment and oligopolistic pricing. Bell Journal of Economics 8: 534-544.
Spence, A.M. 1979. Investment strategy and growth in a new market. Bell Journal of Economics 10: 1-19.
Spence, A.M. 1981. The learning curve and competition. Bell Journal of economics 12: 49-70.
St. Pierre, K., and J. A. Anderson. 1984. An analysis of the factors associated with lawsuits against public accountants. Accounting Review, 59(2):242-263.
Sterling, R. 1967. Conservatism: The fundamental principle of valuation in traditional accounting. Abacus 3(2): 109-132.
Stice, J. 1991. Using financial and market information to identify pre-engagement factors associated with lawsuits against auditors. The Accounting Review 66: 526-533.
Stickney, C.P., and R.L. Weil. 1994. Financial Accounting: An Introduction to Concepts, Methods, and Uses. 7th edition. The Dryden Press-Harcourt Brace College Publishers, Forth Worth, TX.
Stober, T.L. 1996. Do prices behave as if accounting book values are conservative?
Cross-sectional tests of the Feltham-Ohlson [1995] valuation model. Working Paper, University of Notre Dame.
Watts, Ross. L. 2003a. Conservatism in Accounting Part I: Explanations and Implications.
Accounting Horizons, 17(3): 207-221.
Watts, Ross. L. 2003b. Conservatism in Accounting Part II: Evidence and Research Opportunities. Accounting Horizons, 7(4): 287-301.
Wernerfelt, B. 1985. The dynamics of prices and market shares over the product life cycle.
Management Science 31: 928-939.
Wolk, H.I., J.R. Francis, and M.G. Tearny. 1989. Accounting Theory: A Conceptual and Institutional Approach. PWS-KENT Publishing Company.
Zhang, X. 2000. Conservatism accounting and equity valuation. Journal of Accounting and Economics 29: 125-149.
Zmijewski, M., and R. Hagerman. 1981. An income strategy approach to the positive theory of accounting standard setting/choice. Journal of Accounting and economics, 3 (2):129-149.