Abstract One of the major features of financial reporting is conservatism. Accounting conservatism is traditionally defined by the adage “anticipate no profit, but anticipate all losses.” Accounting conservatism is manifested in two general but distinct ways. First, conservatism can be unconditional, meaning that the book value of net assets is understated due to predetermined accounting practices (e.g. immediate expensing of research and development expenditures as incurred). Second, conservatism can be conditional, meaning that the book value of assets is written down under sufficiently adverse circumstances, but not up under favorable circumstances (e.g. goodwill impairment rules). This dissertation focuses only on conditional conservatism. The purpose of this dissertation is to increase our understanding of conditional conservatism through three inter-related essays. These essays seek to answer the following research questions: (1) Are standard measures of conditional conservatism affected by the asymmetry in cash flows? (2) How does “bad news” contribute to the persistence of accruals and cash flows? (3) Do firms manage fair value based goodwill write-offs under Statement of Financial Accounting Standards No. 142 (SFAS 142)? (4) What are the economic consequences of SFAS 142 goodwill write-offs? Collectively, the empirical results of this dissertation further our understanding of the determinants and implications of conditional conservatism. The first essay demonstrates that the asymmetry in cash flows biases standard measures of conditional conservatism. The second and third essays are one of the first to assess conservatism using an individual accrual account, namely, SFAS 142 goodwill write-offs. The second essay examines the reliability of goodwill write-offs, while the third essay provides evidence on the economic consequences of goodwill write-offs. The findings of these two essays are important for the debate on whether fair value measurements in financial statements are appropriate.

In this paper the relation between managerial ownership and conservatism is examined. Managerial ownership decreases agency problems caused by the separation of ownership and control. Managerial ownership increases the time horizon of managers and decreases expropriating behaviour. Conservatism is hypothesized to have the same effect on managers due to the asymmetric timeliness of earnings. This suggest that in firms with lower managerial ownership a demand for conservatism arises to substitute for the alignment function of managerial ownership. This paper test this with two approaches. The first replicates the methodology of previous literature. The findings provide no evidence for substitution between managerial ownership and conservatism. Because the estimators of the first methodology are biased a second method is used applying fixed effects. Consistent with the first approach no supporting evidence is found. However, it finds that firms in the sample have conservative accounting. The main implication of this paper is that rewarding managers with shares is not decreasing their conservative behaviour.

Accounting regulators are concerned about the potential threat of long-term auditor-client relationships on auditor independence, leading to lower audit quality. The main objective of this study is to examine the association between auditor tenure and an important feature of accounting, namely conservatism. Following Basu (1997) and Ball, Kothari and Robin (2000), I define conservatism as the quicker recognition in earnings of bad news about expected future cash flows. I investigate whether long-term auditor-client relationships are associated with less timely recognition of earnings to bad news, and a lower rate of reversal of negative earnings changes. The overall results strongly show that conservatism decreases as auditor tenure lengthens. The results are robust across various measures of conservatism and a series of sensitivity tests. However, auditors¡¯ litigation exposure appears to be able to mitigate the adverse impact of auditor tenure. In additional tests, I find that the reduced conservatism is not driven by the larger clients that auditors have incentives to retain. Moreover, I find that even industry specialists could not avoid the negative impact of longer auditor-client relationships on conservatism. The study provides some support to the regulators who are concerned about the potential negative impact of auditor tenure on audit quality and the rule of mandatory audit firm rotation.

Psychological biases in the form of sentiment can affect various economic decisions including accounting choices. Broadly defined, the term sentiment refers to unjustified beliefs about the future cash flow prospects of the firm (Baker and Wurgler 2006). Asymmetric timely loss recognition (ATLR) is particularly prone to managerial sentiment because the decision to recognize economic gains and losses is based, in part, on managers’ beliefs about the likelihood of future economic events affecting the firms. In this study, I examine the effect of psychological biases about future performance on current accounting choices via the effect of market-level managerial sentiment on ATLR. I find that ATLR decreases with managerial sentiment and that periods of high managerial sentiment are associated with lower concurrent write-offs but higher subsequent write-offs. This study enhances the implications of sentiment on firms’ accounting choices by identifying a time-varying macroeconomic determinant of ATLR that is based on psychological biases about future performance.

Diese Arbeit untersucht, ob (i) das Ausmaß von conditional conservatism und (ii) die Prognosegenauigkeit sowie (iii) Persistenz der Erfolgsgrößen und Cash Flows durch unternehmensspezifische rechtliche Rahmenbedingungen wie die (i) Rechnungslegung, (ii) Kapitalmarktorientierung und (iii) Abschlussprüfung beeinflusst werden. Zum einen lässt sich im Rahmen der Analyse durch die Gegenüberstellung zweier Unternehmensgruppen die Implikationen der IFRS und des HGB und zum anderen aber auch die der Anreizsteuerung über die Agencybeziehungen des Unternehmens zu den Bilanzadressaten auf die Finanzberichterstattung der Unternehmen beschreiben. Es soll demnach explizit der Frage nachgegangen werden, ob diese Implikationen die Informationsfunktion der Finanzberichterstattung hinsichtlich einer Erhöhung der Earnings Quality unterstützen und somit eine weitere Regulierung dieser rechtlichen Rahmenbedingungen sinnvoll erscheint. Es wird innerhalb dieser Arbeit zudem gezeigt, dass das Modell von Basu (1997) nicht für eine angemessene Persistenzmessung geeignet ist, sondern vielmehr die unit root-Spezifikationen von Dickey und Fuller (1979,1981) oder die Threshold-Modelle von Enders und Granger (1998) herangezogen werden sollten. Darüber hinaus wird eine Vielzahl von Spezifikationstests vorgestellt, die u.a. einen multivariaten Ansatz zur Outlierkorrektur und verschiedene Formen der Berücksichtigung von fixed effects in den Regressionen umfasst. Die Resultate der empirischen Untersuchung der deutschen Unternehmen sprechen für eine höhere Persistenz der Erfolgsgrößen der börsennotierten HGB-Bilanzierer sowohl im Vergleich mit den börsennotierten IFRS-Bilanzierern als auch mit den nicht börsennotierten Unternehmen. Conditional conservatism wird jeweils für jede Unternehmensgruppe, jedoch nicht im Verhältnis der Gruppen zueinander, nachgewiesen. Die Rechnungslegung, Kapitalmarktorientierung und Abschlussprüfung besitzen folglich keinen eindeutigen Einfluss auf das Ausmaß von conditional conservatism. Eine weitgehend fehlende Assoziation der drei getesteten rechtlichen Rahmenbedingungen offenbart sich ebenfalls innerhalb der angewendeten Modelle zur Prognose des Cash Flows. Die die Zeitreiheneigenschaften der Erfolgsgrößen und Cash Flows determinierenden Faktoren sind dahingehend eher in der operativen Geschäftstätigkeit eines Unternehmens, bei anderen rechtlichen Rahmenbedingungen oder makroökonomischen Effekten wie der konjunkturellen Entwicklung zu suchen. In der Gegenüberstellung der verschiedenen ökonometrischen Methoden zeigt sich, dass vor allem die Hadi (1994)-Outlierkorrektur das R² erhöht und den Prognosefehler im Verhältnis zur in der Accounting-Literatur vorherrschenden Standardoutlierkorrektur senkt. Die unit root-Spezifikationen nach Dickey und Fuller (1979,1981) bieten im Vergleich zur Spezifikation von Basu (1997) ebenfalls höhere R² und geringere Prognosefehler. Des Weiteren weisen ökonometrische Modelle, welche die Implikationen von conditional conservatism berücksichtigen, jeweils bessere Resultate als Modelle ohne eine Integration dieser Komponente auf. Die in dieser Arbeit vorgestellten Spezifikationstests und alternativen Modelle führen somit durchweg zu einer Verbesserung der betrachteten Gütekriterien und sollten bei einer empirischen Analyse, insbesondere von Paneldaten, zukünftig in der Accounting-Literatur ihre Berücksichtigung finden. Wesentliche Abschnitte dieser Dissertation basieren auf den beiden folgenden Aufsätzen: "A Note on the Time Series Measure of Conservatism", CESifo Working Paper No. 2968, zusammen mit Frank Westermann und "Does the Introduction of IFRS Change the Timeliness of Loss Recognition? Evidence from German Firms", Institute of Empirical Economic Research Working Paper No. 87, zusammen mit Frank Westermann und Carl-Friedrich Leuschner.

This dissertation has three chapters studying accounting conservatism in the property-liability (P&L) insurance industry. There are two types of accounting conservatism – ex-ante (unconditional) conservatism and ex-post (conditional) conservatism. The former means that firms over-report liabilities initially, before more detailed information becomes available. The latter means that firms respond to this new information asymmetrically by recognizing expected losses more quickly than expected gains. My analysis throughout the dissertation focuses on the loss reserve accruals since it is the most significant accruals on the balance sheet. One benefit of studying the P&L insurance industry is that we have specific and detailed information regarding the development of loss reserve accruals over time. Chapter 1 is an executive summary of the next two chapters, highlighting the key results, the policy implications, and the contributions of the dissertation. Chapter 2 studies the two types of accounting conservatism and explore three research questions: (1) whether ex-ante and ex-post conservatism prevails in the P&L insurance industry; (2) what the relations are between ex-post conservatism and other managerial incentives including ex-ante conservatism; and (3) how much the opportunity cost is for being conservative. I study all U.S. domiciled P&L insurance companies from 1996 to 2012 and follow the previous literature to measure accounting conservatism in Chapter 2. I find that both types of accounting conservatism prevail in the insurance industry. Besides, the back-of-the-envelope estimates based on the industry average insurer indicate that their opportunity costs are trivial compared to the amounts of net income and total assets. Chapter 2 also shows that the practices of ex-ante and ex-post conservatism exhibit a nonlinear, U-shape relationship. This finding supports the view that the two types of conservatism can be compliments because they can serve for different purposes. Ex-ante conservatism is mainly used to create a cushion against future unexpected losses, whereas ex-post conservatism can reduce informational frictions. In Chapter 3, I develop a new method of assessing conditional conservatism using more detailed data from the insurance industry. I look at how conditional conservatism affects insolvency risk and the financial strength rating of P&L insurance companies. I also investigate how a change to accounting rules affects conditional conservatism. The new method of measuring conditional conservatism is based on the concavity of the loss development curve. I study all U.S. domiciled P&L insurance companies from 1995 to 2015 and find that the greater the degree of conditional conservatism, the lower is insolvency probability, and the better is the financial strength rating, with other things being constant. The result indicates that regulators and rating agencies do reward insurers that voluntarily utilize conditional conservatism accounting strategy. Moreover, I find that the level of conditional conservatism is reduced after the enactment of the Model Audit Rule (MAR). MAR, like the Sarbanes-Oxley Act Section 404, increased board oversight of internal risk management. The result suggests that complying with additional disclosure requirements provides a “safe harbor” for insurance companies so that they have fewer incentives to be conditionally conservative. / Business Administration/Risk Management and Insurance