SLIDE 1

• Conditional conservatism is defined as the asymmetric recognition between good news

and bad news, where the latter one is anticipated by the market (Basu, 1997).

• The traditional view of conservatism in GAAP helps to protect creditors (Watts and
Zimmerman, 1986).

• If firms anticipate bad news (economic losses), they are reducing uncertainty about
future events .

• The role of conservatism on contracts allows a more efficient monitoring of managers

and it increases the demand for timely information of bad news to protect creditors (Basu,
1997; Donovan, Frankel and Martin, 2015)
SLIDE 2 (Explicar porque firmas alavancadas possuem maior demanda por
conservadorismo)

• Prior literature shows that debt contracting play a role on conditional conservatism and
earnings quality measures (Watts and Zimmerman, 1986; Ball, 2001; Bharath et al.,
2008; Armstrong et al., 2010; Shivakumar, 2013; Sunder et al., 2018) and that highly
leverage firms have higher demand to report conservatively (Watts,2003a; Zhang,
2008).

SLIDE 3 (ideia de incerteza)

• Thus, to reduce uncertainty about future cash flows “accountants, auditors, regulators,
and the courts determine the uncertainty to be unacceptably high for stewardship and
contracting purposes” (Kothari et al., 2010, p. 280).
• Managers can recognize/anticipate losses in advance looking a year ahead to reduce the
uncertainty about future events, in order to protect creditors.
SLIDE 4 (Ciclo operacional)

• Each firm has its own period of time (cycle) to buy inventory, produce and sell their
products and to collect cash from the sales and the operating cycle captures this
information.
• I use the length of operating cycle as a proxy for the firm’s contracts. Longer operating
cycles indicates long-term contracts and shorter operating cycles indicates short-term
contracts.
• Higher uncertainty generates higher demand for conservatism, in order to protect
shareholders. Also, firms with longer operating report less reliable accounting numbers
and suffer from more information asymmetry and agency problems (Dechow, 1994;
Dechow and Dichev, 2002) which generates a higher demand for conservatism (Khan
and Watts, 2009).
•

SLIDE 5 (tabela)

• I expect that highly leveraged firms with longer operating cycles behave conservatively
and that lower leveraged firms with shorter operating cycles are less conservative.
However, how leverage and operating cycle combined together affects conservative
demand in the environments HS (high leverage-short operating cycle) and LL (low
leverage-long operating cycle) is slightly tricky, so I do not make an ex-ante prediction
as to the direction of the impact.