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The Role of Social Values, Accounting Values and Institutions in Determining Accounting Conservatism

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An Erratum to this article was published on 08 March 2013

Abstract

  • The extant literature on cross cultural differences in conservatism finds that a mix of institutional and economic variables influences differences in the level of conservatism across countries. Using the modified Gray model Doupnik and Tsakumis (J Acc Lit 3(1): 1–20, 2004) we examine whether societal values are a neglected explanatory factor for differences in levels of accounting conservatism across countries.

  • Both unconditional and conditional conservatism are measured. Social values are measured using both a composite value for conservatism Hope et al. (J Acc Public Policy 27(5): 353–357, 2008) and individual values from Hofstede and Hofstede in Cultures and organizations: Software of the mind (2nd ed., New York, McGraw-Hill, 2005). A test sample of 89,481 firm-years from 1989 to 2006, compressed to 341 (or 342) country-year observations from 22 countries provides the data for OLS regressions.

  • We find that after controlling for previously documented legal and financial institutional variables, both conditional and unconditional accounting conservatism are greater in countries with more conservative societal and accounting values. The Hofstede value of femininity (the importance of caring for others) is also significant for both measures of conservatism.

  • These findings provide a more complete model for further testing of accounting conservatism and other topics using societal values. They also provide support for the modified Gray model using archival data. Finally, while both dimensions of conservatism matter and while they share some common explanators, both have unique additional influencing factors in culture and institutions.

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Notes

  1. These beliefs and actions predate the European settlement of the United States.

  2. Ball et al. (2008, p. 194) note that the unconditional definition of conservatism has been employed in much prior literature, including the international accounting literature (e.g., Gray 1980). Notably, creditor protection has been offered as the main explanation for the conservative balance sheets of German companies in particular.

  3. Depending on the model specification.

  4. These institutional variables include English, French and Scandinavian legal systems which are dummy variables that receive the value of 1 if the firm/year’s legal origin is English, French and Scandinavian, 17 respectively, and zero otherwise. Debt/GNP, Equity/GNP, Rule of Law, Corruption and Creditors’ Rights are extracted from La Porta et al. (1997, 1998).

  5. Gray’s (1988) accounting values have been widely tested without definitive results. See Doupnik and Tsakumis (2004) for a review of this literature.

  6. We compute the scores for each country’s AVC using Hofstede’s (1980) social values (SC) for uncertainty avoidance minus the sum of individualism and masculinity score.

  7. For example, Francis and Wang (2008) assume that the ratio current accruals to sales is equal to 0.15 for a firm in year t-1, based on sales of US$ 100 and current accruals of US$ 15 in t-1. If sales in year t are US$ 140, then predicted current accruals in year t would be US$ 140*0.15 = US$ 21. The same procedure is used for predicted depreciation expense, which is based on the prior year’s ration of depreciation expense to gross PPE.

  8. DATA items refer to the appropriate items in the COMPUSTAT data base.

  9. This approach has advantages over pooling firm-level observations across countries or simply using country-level information in the following ways. First, the results under this approach will not be affected by different numbers of observations from each country, which can bias the results towards more heavily represented countries. Second, this approach alleviates concerns associated with cross-sectional dependence in the data, which can inflate the test statistics. Third, by examining country-year rather than country-level observations, we exploit possible year-to-year variations in accounting conservatism across countries.

  10. We use DATA32 from Compustat Global, which represents the income or loss reported by a company after expenses and losses have been subtracted from all revenues and gains for the fiscal period, including extraordinary items and discontinued operations.

  11. For our second test of conditional conservatism using the Givoly and Hayn (2000) operationalization, we use the variable name MKTCAPRES which is calculated using the initial MKTCAP cariable amended as follows. “Two variables, MKTCAP and ENGLISH are highly correlated with AVC, our cultural conservatism measure. To avoid multicollinearity issues, we “orthogonalize” these variables: We regress MKTCAP and ENGLISH on AVC and use the residual of the regression as dependent variable in our models.” These are referred to as MKTCAPRES and ENGLISHRES in Table 6 of the results.

  12. A firm is considered privately owned if the State is not a known shareholder in it.

  13. Although later regression analysis finds when other variables are added they become significant.

  14. Ball et al. (2008, p. 178) refer to this as “asymmetrically timely loss recognition relative to gain recognition” i.e., the incremental timely loss regression coefficient which measures the extent to which losses are reported more quickly than gains.

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Authors and Affiliations

  1. College of Business, University of Texas at El Paso, El Paso, USA

    Stephen B. Salter &  Giorgio Gotti

  2. School of Accounting, Oklahoma State University, Stillwater, USA

    Tony Kang

  3. University of South Carolina, Columbia, USA

    Timothy S. Doupnik

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  1. Stephen B. Salter
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  2. Tony Kang
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  3. Giorgio Gotti
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  4. Timothy S. Doupnik
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Correspondence to Stephen B. Salter.

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Salter, S., Kang, T., Gotti, G. et al. The Role of Social Values, Accounting Values and Institutions in Determining Accounting Conservatism. Manag Int Rev 53, 607–632 (2013). https://doi.org/10.1007/s11575-012-0152-1

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