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We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to subsequent decreases in information asymmetries between firm insiders and outsiders. We predict and test if this decrease in information asymmetries manifests itself through: (a) a decrease in the bid-ask spread and in stock-returns volatility, and (b) an improved information environment for financial analysts, leading to more precise and less dispersed forecasts, and to more analysts following the firm. Using a large US sample for the period 1977-2007 and several proxies for conservatism we find robust evidence consistent with our expectations. Our results are in line with conservatism being useful not only for debt-holders, but also for equity-holders. ; We acknowledge financial assistance from the Spanish Ministry of Education and Science (ECO2010–19314, ECO2008–06238/ECON and SEJ2007-67582/ECON), the ICJCE/AT1 UAM-Auditores Madrid Chair, IESE Research Division, the Government of Comunidad de Madrid (Grant CCG10-UC3M/HUM-4760) and the AECA Chair in Accounting and Auditing.

We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognized otherwise, or by delaying the recognition of current economic gains that would have been recognized had circumstances been different. ; The authors would also like to thank John Graham, who kindly provided estimates for the marginal tax rate. They acknowledge financial assistance from IESE Research Division, the Spanish Ministry of Science and Innovation (ECO2008-06238-C02-01/ECON and SEJ2007-67582-C02-02/ECON), and the European Commission INTACCT Research Training Network (MRTN-CT-2006-035850) ; Publicado

We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognised otherwise, or by delaying the recognition of current economic gains that would have been recognised had circumstances been different ; We acknowledge financial assistance from IESE Research Division, the Spanish Ministry of Science and Innovation (ECO2008-06238-C02-01/ECON and SEJ2007-67582-C02-02ECON), and the European Commission INTACCT Research Training Network (MRTN-CT-2006-035850)