Conditional Conservatism: a Study from Early Recognition of Results with Economic Losses

Abstract

The Conditional Conservatism requires a higher degree of good news verification to recognize them as profit in relation to the degree of bad news verification for their recognition in the year results. Address the concerns regarding the accounting information quality, this paper main goal is to measure the Conditional Conservatism from the early recognition of economic losses measured by the ratio of Operating Cash Flow and accounting accruals, comparing the found differences between companies that belong to Bovespa's governance levels with the traditional market companies. This article uses the early recognition of economic losses model from Ball and Shivakumar (2005). For this, statistical models were estimated for a sample of 96 companies from 2005 to 2007 based on available annual information at Economática® and reported data in footnotes. With the aim of selecting an economic event that may impact on the asymmetric recognition of economic result, it was decided to compare results among companies listed on Bovespa's governance levels with other companies. The results show that the companies in the sample do not present the conditional conservatism in the published financial statements results. There is a managers’ preference to avoid the losses investigation in their accounting results. The results also refute the idea that the listed companies in the governance levels have higher informational quality than companies in the traditional market, since the conditional conservatism use has not been identified in both groups.