For correspondence:-
Received: 17 Nov. 2017 Accepted: 23 Jan. 2018 Published: 31 March 2018
Citation: Accounting Conservatism and Information Asymmetry. Account Tax Rev 2003; 2(1):72-91 doi:
© 2003 The authors.
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Abstract
Value relevance literature provides a framework for linking accounting information to investment decision making. The relevance of any accounting information, therefore, lies in the fact that it assists in analysing firm’s current performance and value, as well as in predicting future financial performance. Management is saddled with the responsibility of preparing and presenting financial statements; and as such can withhold or distorts information to suit their objectives. This is the so-called information asymmetry. Conservatism in accounting is intended to provide guidance in the face of uncertainty and need for estimation. Therefore, it makes losses to be recognised more quickly than gains. However, the conceptual frameworks of IASB and FASB elevate the objective of neutrality above prudence and argue that conservatism can introduce bias into accounting numbers thereby increasing asymmetry among users. This paper is motivated largely by these concerns and addresses the information consequences of conservatism, whether it reduces information asymmetries between firm’s insiders and outside equity investors, and its usefulness to equity holders. Using library research approach, the weight of evidence obtained from a review of conceptual and empirical studies suggest that conservatism contributes to reducing information asymmetries and improves the information environment of the firm
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