The Relationship between unconditional and conditional conservatism: Impact of different stages of the firm-life cycle

Purpose: This paper investigates whether the use of unconditional conservatism preempts the use of conditional conservatism across different stages of firm life cycle. Design/methodology/approach: We use a sample of 1,193 U.S. non-financial companies listed on the New York Stock Exchange from 2010 to 2018 and conduct regression analyses to examine the relationship between the use of unconditional and conditional conservatism during different stages of firm life cycle. Findings: The empirical evidence confirms that on an overall basis unconditional conservatism preempts conditional conservatism. But examination of the relationship between two conservatism concepts during different stages of firm life cycle shows that this happens only during the introductory and growth stages and not during the maturity and decline stages. Originality: The findings contribute to our better understanding of the relationship between unconditional and conditional conservatism and managerial decisions to use accounting conservatism during different stages of firm life cycle. Though on an overall basis, the findings support Beaver-Ryan’s (2005) assertion that unconditional conservatism preempts the use of conditional conservatism, they demonstrate that Beaver-Ryan’s assertion is valid only for the introductory and growth stages and not for the maturity and decline stages. The findings also provide useful information to regulators for developing financial reporting standards to improve accuracy and reliability of reported information which will enhance its quality during different stages of firm life cycle.