Earning Management and the Role of Accounting Conservatism at Firm Level

Abstract

Accounting conservatism and earning management are very much pervasive in financial reporting practices. Therefore, this research study aims to investigate the relationship between accounting conservatism and earning management by using a sample of 317 non-financial Pakistani firms consisting of 4204 firm-years over the period 1999-2013. Conservatism at the firm level is estimated by using the C-Score measure and earning management is observed by calculating discretionary accruals. The estimated results show that one fourth (86 firms) of the sample is highly conservative; out of these 76% (65 firms) showed least earning management (Earning management 1) while 24% (21 firms) showed moderate earning management (Q 1 3). On the other hand, in the least conservative group, 71% (57 firms) showed high earning management (Earning management > Q 3) and 29% (23 firms) showed earning management at a moderate level (Q 1 3). Thus the findings of the study reveal a negative association between accounting conservatism and earning management.