The Relation between Earnings Conservatism and Balance Sheet Conservatism

Earnings conservatism is defined as the extent to which firms expected losses are reflected more timely than expected gains of a firm. Balance sheet conservatism shows values which are recognized in the market but not in the books. This conservatism is measured using market-to-book value ratio. It is essential to investigate the relation between earnings conservatism and balance sheet conservatism when one uses the earnings- returns relation to investigate cross-sectional or time-series differences in earnings conservatism. The sample consists of 80 firms for the period of 2005-2011. The results show that earnings are not conservative in all periods and there is a negative relation of earnings conservatism and accrual conservatism with balance sheet conservatism.