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Conditional and Unconditional Conservatism:Concepts and Modeling

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Abstract

We develop a model that captures the distinct natures of and interactions between conditional and unconditional conservatism. Under unconditional conservatism, the book value of net assets is understated due to predetermined aspects of the accounting process. Under conditional conservatism, book value is written down under sufficiently adverse circumstances, but not up under favorable circumstances. The specification of earnings provided by the model yields hypotheses about how unconditional conservatism and other factors preempt conditional conservatism and so affect the asymmetric response of earnings to positive and negative share returns, both current and lagged, documented by Basu (1995, “Conservatism and the Asymmetric Timeliness of Earnings.” Ph.D. dissertation, University of Rochester’ 1997, “The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24, 3–37).

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Authors and Affiliations

  1. Graduate School of Business, Stanford University, Stanford, CA 94305

    William H. Beaver

  2. Stern School of Business, New York University, 44 West 4th Street, New York, NY, 10012

    Stephen G. Ryan

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  1. William H. Beaver
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  2. Stephen G. Ryan
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Correspondence to Stephen G. Ryan.

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Beaver, W., Ryan, S. Conditional and Unconditional Conservatism:Concepts and Modeling. Rev Acc Stud 10, 269–309 (2005). https://doi.org/10.1007/s11142-005-1532-6

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  • DOI: https://doi.org/10.1007/s11142-005-1532-6

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