ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Impact of the Asymmetric Cost Behavior on Accounting Conservatism

  • Sae-Ro-Na Kim Dongguk University

Asian Tax Journal Vol. 13 No. 2 (2012), pp. 197-227

Abstract

In this paper we argue that the cost stickiness generates conservatism in financial statements. Specifically, we investigate a relationship between the cost stickiness and the conservativeness of accounting information in the full sample. And then, after dividing the full sample into the firms with good financial condition and the firms with bad financial condition, we examine the effect of the cost stickiness on financial reporting conservatism. In addition, we analyze the impact of the cost stickiness on the accounting conservatism by relying on the firm life－cycle. This sample consists of 8,475 firm－years (non－banking firms) listed on the Korean Stock Exchange over the period of 1995－2009. The empirical results are summarized as following.. First, our empirical tests are consistent with our proposition that the cost stickiness is significantly positively related to conservatism. Second,the results of the analyses appear that the cost stickiness is significantly positively related to conservatism in the firms with bad financial condition. In the mean time, the cost stickiness is significantly negatively related to conservatism in the firms with good financial condition. These results suggest that financial reporting conservatism is one potential mechanism to diminish the agency costs. This study thus provides evidence of a demand for conservatism from the shareholders.

Keywords

  • Asymmetric cost behavior
  • cost stickiness
  • Conservatism

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Asian Tax Journal

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