Effect of Accounting Conservatism on Earnings Quality

Abstract

This paper examines the effect of accounting conservatism on earnings quality. The paper assumes that the level of conservatism varies according to several factors. Thus, the change in each of these factors influences the level of conservatism, which in turn affects earnings quality. The paper applies the Basu model (1997) with modification to test the relationship between accounting conservatism and earnings quality. The model is applied on a sample of listed firms in Amman Stock Exchange (ASE) over the period from 2001 to 2012. Results showed that high change in investment levels, high percentage of institutional investors and market classification increase the level of conservatism and consequently decrease the quality of earnings. These results indicate that earnings quality changes from one period to another and varies among firms according to changes in conservatism level.