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Growth, Managerial Reporting Behavior, and Accounting Conservatism
Gerald Lobo, University of Houston
Kiran Parthasarathy, University of Houston
K . (Shiva) Sivaramakrishnan, University of Houston
ABSTRACT. This study investigates whether firm growth is a determinant of the degree of conservatism in financial reports. Using the differential timeliness measure of Basu (1997), and a modified version of the Basu model, we document that the degree of conservatism is far more pronounced for low-growth firms than high-growth firms. This suggests that the aggressive reporting behavior of high-growth firms may be muting the extent of conservatism in their financial reports. Indeed, when we directly examine discretionary reporting behavior, we find evidence of a lower degree of conservatism for higher levels of reporting discretion (i.e., more positive discretionary accruals). Thus, using both a driver of aggressive reporting behavior (growth), and a measure of such behavior, we are able to explain cross-sectional variation in the degree of conservatism.
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