In a recent study, Barton and

Waymire [2004] provide evidence that managers’ incentives to supply high quality
financial statements increase with the level of shareholder-debtholder agency conflicts
as
proxied by the amount of leverage in the firm’s capital structure.

since the firm’s risk

increases with the firm’s financial leverage.
#### COHEN 2006 / 2019 ####
Evidence suggests that higher property costs are associated with a lower quality of
accounting information.
Evidence of negative association between firm’s total risk and financial reporting quality
Significant negative relation is documented between reporting quality and idiosyncratic
risk – Maior risco = menor qualidade, outro fator que aumenta a demanda por
conservadorismo – A medida que o risco idiossincrático da firma aumenta a qualidade
da informação reportada diminui, aumentando assim a demanda por conservadorismo
em firmas mais arriscadas.

#### colocar que firmas com longo ciclo operacional possuem menor qualidade, todas
as métricas e, por isso, conservadorismo seria mais importante, ou elas tendem a ser
mais conservadoras ###

BALL E SHIVA 2005

Governance is affected because timely loss recognition makes managers less likely to
make investments they expect ex ante to be negative-NPV, and less likely to continue
operating investments with ex post negative cash flows.
Debt is affected because timely loss recognition provides more accurate ex ante
information for loan pricing and more quickly triggers debt agreement rights (such as
repricing, and restrictions on leverage, investment and dividends) from violating
covenants based on ex post accounting ratios. – Empresas com ciclos mais longos, dada
as incertezas inerentes, podem vir a ter custos mais altos de capital, desse fato, os
gestores não possuem incentivos para serem conservadores, dado que a antecipação das
dívidas aumentaria ainda mais o custo de capital.
Timely loss recognition therefore increases managers’ incentives to act quickly to
limit economic losses, and thereby increases the efficiency of contracting between
firms and managers. – também constrange o deferimento das perdas para períodos
subsequentes.
the conditional form of conservatism (timely loss recognition) can improve contracting
efficiency. It more quickly triggers debt covenant violations that transfer decision rights
to lenders, allowing lenders to restrict managers’ actions (such as distributions,
borrowing, and new investment) sooner after economic losses become apparent, thereby
increasing the efficiency of debt contracting. Similarly, timely loss recognition gives
managers less incentive to undertake ex ante negative-NPV projects and more incentive
to abandon ex post loss-making investments quickly, thereby increasing the efficiency
of compensation contracting and corporate governance.
 LaFond and Watts (2008) argue that through their inside information about the firm,
managers are encouraged by asymmetric losses to increase profits to transfer to
themselves the wealth that would be of the shareholders.

Conditional conservatism reduces the informational asymmetry by imposing timely

recognition of losses and delaying the recognition of economic gains, which reduces
accrual based earnings management successfully (WATTS, 2003; GUAY AND
VERRECCHIA, 2006; LaFOND AND WATTS, 2008) and recognizing business losses
in due time, informs to the market the inherent risks of a company.

Easley and O’Hara [2004] imply that firms can affect their cost of capital through the
precision and quantity of the information they provide investors. Building on the above
theory, Francis et al. [2004, 2005] seek to provide evidence consistent with the pricing
effects of information quality and claim that accrual quality is a systematic priced risk
factor. Theevidence documented in Francis et al. [2004, 2005] suggests that information
seems to affect the cost of capital.
Cohen (2006 ) following (…) stated that …
Following Barone [2002] and Francis et al. [2004, 2005], lower quality financial
reporting leads to greater uncertainty and ultimately to higher information risk. –
Segundo Dechow, firmas com longos ciclos operacionais possuem menor qualidade
e/ou são mais arriscadas, sendo assim, os gestores tendem a ser mais conservadores para
mitigar esse risco, dado que o conservadorismo serve pra isso.
Leverage is included as an additional explanatory variable since the firm’s risk
increases with the firm’s financial leverage.
The presence of agency costs gives rise to demand for monitoring. Highly leveraged
firms have higher agency costs and thus a greater demand for monitoring.

BASU(97)

Conservatism has been an enduring qualitative characteristic of financial reporting for at

least five centuries
I interpret conservatism as resulting in earnings reflecting 'bad news' more quickly than
'good news. I also predict and find that negative earnings changes are less persistent
than positive earnings changes. Earnings response coefficients (ERCs) are higher for
positive earnings changes than for negative earnings changes, consistent with this
asymmetric persistence.
I interpret conservatism as capturing accountants' tendency to require a higher degree
of verification for recognizing good news than bad news in financial statements. Under
my interpretation of conservatism, earnings reflects bad news more quickly than good
news. For instance, unrealized losses are typically recognized earlier than unrealized
gains. This asymmetry in recognition leads to systematic differences between bad news
and good news periods in the timeliness and persistence of earnings.
Asymmetric timeliness in news recognition is expected to manifest itself also as
asymmetric persistence in earnings. Since accountants typically report the capitalized
value of bad news as losses, bad news earnings is more timely but less persistent. In
contrast, good news is reflected in earnings on a less timely basis, but good news
earnings tends to be more persistent. Good news earnings is less timely because
accountants require more verifiable information before they recognize good news. But
good news earnings is more persistent than bad news earnings because the capitalized
value of the good news is only partially reflected in current earnings, and after
verification, is also reflected in subsequent earnings.
I argue that negative earnings changes are asymmetrically less persistent than positive
earnings changes because of conservatism
arguments).
In a world of uncertainty regarding future profits, managers often possess valuable
private knowledge about firm operations and asset values. If managerial compensation
is linked to reported earnings, then managers have incentives to withhold from
reported earnings any information that would adversely affect their compensation.
Juliana molina dissertação diz : Basu (1997) examinou as potenciais consequências de um
baixo grau de qualidade das informações dos lucros e identificou o seu impacto sobre a
assimetria informacional. O autor documentou que esse baixo grau de earnings quality
contribui significativamente na assimetria informacional em torno dos anúncios dos lucros
nos relatórios contábeis, reduzindo a liquidez nos mercados financeiros, especialmente
para empresas em que os ganhos representam a principal fonte de informação para os
participantes do mercado.

LA FOND E WATTS 2008

This conservatism is attributed to the use of financial statements in debt and/or
compensation contracts, litigation, regulatory and political processes, and taxes (Watts
2003a, 2003b). In the contracting explanations, conservatism occurs because it reduces
agency costs associated with (1) asymmetries in information and loss functions among
the contracting parties; and (2) an inability to verify the more informed parties' private
information
In other words, firms with higher information asymmetry between insiders and outside equity
investors report more conservative earnings

##MARTINEZ LOPO ESCREVEU - ALTERAR ###

Debt covenant hypothesis of positive accounting theory (Watts & Zimmerman, 1986)
presented that the closer a company with the violation of credit agreement based on
accounting was more allowed the company manager to select the accounting procedure
which moved the reported profit from the next period to now.
Beatty and Weber (2003) suggests that leveraged firms engage in Earnings Manangement
to avoid debt covenant default.

###DECHOW 96 ###
First, it is a noisy measure of closeness to covenants, since optimal
leverage ratios and the corresponding ratios used in debt covenants are
likely to vary as a function of firm characteristics such as the investment
opportunity set (e.g.. Smith and Watts 1992).
We find that an important motivation for eamings
manipulation is the desire to attract external financing at low cost.
The results indicate that important motivations for earnings manipulation are the
desire to raise extemal financing at low cost and to avoid debt covenant restrictions.
Finally, our results are consistent with the firms experiencing a significant increase in
their costs of capital following the revelation that their eamings have been overstated.
This suggests that manipulating eamings initially enables the firms to enjoy lower costs
of capital, but that once the earnings manipulation is revealed, the firms experience
significant increases in their costs of capital.
Nevertheless,
we conclude that the desire to raise extemal financing at low cost represents an
economically significant motivation for earnings manipulation that has received
relatively little attention in previous academic research.
Finally, our results have implications for research into firms' disclosure policies. Existing
research argues that there are long-term benefits to building reputations for providing
reliable and timely disclosures (Lev 1992; Healy and
Palepu 1993; Lang and Lundholm 1993; Botosan 1995; Frankel, McNichols,
and Wilson 1995; and Healy, Palepu and Sweeney 1995). Yet the sample of firms
investigated in this study chose to risk (and ultimately lose) these benefits for the
prospect of short-term gain. Thus, our study highlights the trade-offs that
are made in choosing a firm's disclosure policy.
Second, leverage ratios are positively related to the demand for external equity
financing. In particular, Opler and Titman (1994) show that firms that have high
leverage ratios due to large accumulated losses are more likely to issue equity. As a
result, leverage ratios are also likely to proxy for the demand for external financing
motivation.

BORTON AND WAYMIRE 2004

We examine whether availability of higher quality financial information lessens investor
losses during a period seen as a stock market crash.
we find that the quality of firms’ financial reporting increases with managers’ incentives
to supply higher quality financial information demanded by investors.
More conservative financial reporting can enhance information credibility when investors
believe that managers might seek to overstate income and net assets for personal gain.
Contracting and control conflicts play an important role in managers’ voluntary reporting
policies.
Conservatism is positively associated with leverage the presence of a potential income
measurement conflict that can affect distributions to claimants also is associated with
more conservative reporting (ahmed et al 2002)
These findings are consistent with a longstanding demand for accounting information
based on contracting (Watts, 1977, 2003; Watts and Zimmerman, 1983).
As a whole, our findings suggest that managers select financial reporting quality by
factoring in investor demand for information.
Managers’ incentives to supply higher quality financial statements increase with the level
of shareholder–debtholder agency conflicts. (…) Agency conflicts potentially increase
with the amount of leverage in the firm’s capital structure, so we predict (dizer> so, its
safe to say) that managers of more levered firms will issue higher quality financial reports.

LAWRENCE, SLOAN AND SUN (2013) – non discretionary conservatism

A large body of accounting research finds that various contracting incentives lead
managers to engage in conservative accounting practices.
Ahmed et al (2002) argue that firms experiencing more severe bondholder-shareholder
dividend policy conflicts adopt more conservative accounting
nikolaev 2010 argues that when debt contracts rely on accounting based covenants,
bondholders are likely to provide higher incentives for timely loss recognition to the
firm's management and its auditors

ZHANG 2008 – the contract benefits

I document that conservatism benefits lenders ex post through the timely signaling of
default risk, as manifested by accelerated covenant violations, and benefits borrowers ex
ante through lower interest rates. – fazer ponte com: Higher leverate rations increase
interest rations
Lenders are also likely to value smoothness, persistence and predictability of earnings,
since predictable earnings series generates a steady stream of future interest payment
and leads to lower default risk, and smooth earnings series correlate with low risk profie
– FAZER PONTE COM CICLO OPERACIONAL / OPERATING CYCLE

WATTS 1993
led to accounting being used to supply information to capital market participants
who contract with the firm (e.g., existing shareholders and creditors –– see Watts and
Zimmerman, 1983).

KHAN E WATTS 2003

LaFond and Watts (2008) predict that increases in information asymmetry between parties
to the firm lead increases in conservatism, rather than conservatism leading information
asymmetry.
Accounting conservatism is expected to increase with the firm’s likelihood of litigation
(Beaver, 1993; Watts, 1993; Basu, 1997; Holthausen and Watts, 2001; Watts, 2003a)

Highly levered firms have agency conflicts between lenders and shareholders. Well-known
agency problems between these two parties include excessive shareholder distributions,
asset substitution, underinvestment and claim dilution.9 Conservatism results in ‘hard’ or
verifiable lower bounds for accounting numbers used in debt contracts, thereby
constraining opportunistic diversion of resources and triggering debt covenant violations in
a timely fashion (Watts and Zimmerman, 1986, pp.213-215; Watts, 1993, p.2; Ball, 2001;
Watts, 2003a). This suggests a higher contracting demand for conservatism from more
levered firms. Financially distressed firms are more likely to be sued, and the likelihood of
financial distress is increasing in leverage, suggesting a higher litigation demand for
conservatism from more levered firms.

Conclusion: firms with longer investment cycles, and firms with higher idiosyncratic
uncertainty are more conservative.
-

THE PERSISTENCE OF ACCRUAL AND INVESTMENT IN OPERATING CYCLE

Hosseinimehr and Nourifard, 2014;
The results indicate that the persistence of total accruals, long-term investment and
external financing are negatively related to operating cycle
As in many studies have been shown, including Sloan (1996) and Xie (2001), low
persistence of accruals is due to the poor quality of accounting information and it is
because of the relation between accrual component of earnings and management
estimates and predictions which reduces the reliability of information.

Khan e Watts 2009 since conservatism is an efficient governance and contracting

mechanism for reducing agency costs generated by those information asymmetries (Watts,
1993; Ball, 2001; Holthausen and Watts, 2001; Watts, 2003a),

Watts and Zimmerman (1990)

It is clear there is a relation between firms’ accounting choice and other firm variables,
such as leverage
All the contracting provisions (including the accounting polices ) are endogenous

Garcı´a Laraetal. (2009) find a positive association between recognition and governance
characteristics commonly associated with effective monitoring
Pae et al. (2005), also using the BKR metrics, find that firm-level price-to-book ratios
are a determinant of timely loss recognition and that the negative association is
correlated with the accrual component of earnings – LER ESSE ARTIGO !!! pode ser
importante pra provar que o lucro é um fator importante no reconhecimento e fazer a
relação ciclos longos, discricionariedade e conservadorismo.
Ball and Shivakumar (2005), Ball et al. (2008) , Ball et al (2003) e Pae et al
(2005)Taken together, all four studies suggesdt that timely loss recognition has an
endogenous component related to firms' reporting incentives, primarily equity
incentives. Thus, assuming that managers are responding to investor demand for
decision usefulness, these studies suggest that equity market perceive asymmetric
timeliness as imporving earnings quality. – Posso falar que esses 4 estudos sugerem que
o conservadorismo é um componente relacionado aos incentivos das firmas e colocar (
See Dechow e Schrand 2010) – BUSCAR OUTROS QUE FALAM ISSO
Dechow et al. 1996 find that manipulation firms have higher leverage ratios and are
more likely to violate debt covenants during and after the manipulation period than
control firms. – BUSCAR MAIS DESSE TEMA.

### ESCREVER A HIPÓTESE DE FORMA NULA, ASSIM COMO DEVANDRA

FEZ NO ARTIGO DELE COM SURESH.
- Conservadorismo pra mitigar problemas, porém exise a tendência oportunística dos
gestores.

a positive relationship with leverage, information asymmetry, corporate age and size, investment
opportunities and cash flow changes (Faulkender, 2002);

Leverage captures the debt contracting demand for conservatism

leverage IS positively related to asymmetry in the returns distribution (Dutta e

Patatoukas, 2017 – Identifying condi )
leverage IS positively related timeless recognition (Collins 2014) – higher leverage
higher conservatism
According to Watts (2003a), LaFond and Watts (2008) and Khan and Watts (2009),
high levered firms are more likely to demand more conditional conservatism levels.
Highly levered firms have more agency conflicts between lenders and shareholders.
Firms can minimize these expected agency costs by recognizing bad news as early as
possible (MUDAR A FORMA QUE ESTÁ ESCRITA – ISSO VEIO DE WATTS
2003a)
higher conservatism is associated with new loan contracts and that levered firms are
more conservative when they have higher investment risk Wei and Tao (2007)

Considera-se a
alavancagem, visto que as corporacoes mais
endividadas, ou alavancadas, possuem maiores
conflitos de agencia (WATTS, 2003ª ?? – é o B na vdd) e,
dessa forma, sao positivamente relacionadas
com o conservadorismo e, consequentemente,
com a assimetria de informacao.

Em ciclos mais longos é mais fácil o diferimento das perdas, dada a maior
discricionariedade dos accruals dessas firmas ( see Dechow e Dichev, 2002 )

#### size ####

Accounting Conservatism and Firm Value: Evidence from the Global Financial
Crisis WATTS AND ZUO 2012
We expect Size to be negatively associated with conservatism since larger firms likely
have lower information asymmetry.

Also, poorer accrual quality is associated with larger cost of debt and equity (see Francis,
LaFond, Olsson and Schipper, 2005)