Constuct validity of the major and emerging firm-specific accounting conservatism proxies

Olesen, Marie Louise (2010). Constuct validity of the major and emerging firm-specific accounting conservatism proxies Honours Thesis, UQ Business School, The University of Queensland.

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Author Olesen, Marie Louise
Thesis Title Constuct validity of the major and emerging firm-specific accounting conservatism proxies
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2010-10
Thesis type Honours Thesis
Supervisor Tracy Artiach
Peter Clarkson
Total pages 126
Language eng
Subjects 1501 Accounting, Auditing and Accountability
Abstract/Summary Conservatism’s influence on accounting theory and practice is enduring. It enjoys a prominent role in the literature and has emerged as one of the most intensely researched topics over the last decade (Guay and Verrecchia 2007). This literature relies heavily on conservatism proxies to make inferences regarding the association between conservatism and variables of interest. Four firm-specific conservatism proxies have emerged at the forefront of the literature: (1) Givoly and Hayn’s (2000) negative accruals measure, (2) Penman and Zhang’s (2002) hidden-reserves measure, (3) Beaver and Ryan’s (2000) book-to-market measure and (4) Khan and Watts’ (2009) firm-year AT measure. Whilst the use of these conservatism proxies is pervasive in the literature, there remains considerable conjecture regarding their ability to accurately gauge conservatism. This is a pressing issue as drawing inferences from studies of accounting conservatism critically relies on the validity of conservatism proxies. Given the existence of multiple firm-specific proxies for a single construct and the debate regarding the validity of the multiple measures, an empirical examination of the construct validity of these measures is prudent and timely. This thesis seeks to fill the gap. Using a sample of U.S. listed firms for the period 1997 to 2007 this thesis empirically examines the construct validity of the aforementioned firm-specific proxies for accounting conservatism along four dimensions: concurrent validity, discriminant validity, predictive validity and convergent validity. The results provide mixed support for the validity of the alternative conservatism proxies. Importantly, what has emerged in the findings is that the alternative proxies exhibit different characteristics and show little consistency between them, thus suggesting that they do not capture the same construct. Hence, the alternative proxies cannot simply be considered substitutes.

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Created: Tue, 17 Jul 2012, 10:44:12 EST by Karen Morgan on behalf of UQ Business School