The temporal effects of accounting conservatism on changes in accounting estimates

Purpose While prior research has primarily attributed changes in accounting estimates (CAE) to either opportunistic behavior or business risk, this study proposes accounting conservatism as a third explanatory factor. This paper aims to provide empirical evidence that conservative accounting practices are positively associated with income-increasing CAE. Design/methodology/approach Using a sample of 3,707 CAE disclosures in the USA from 2006 to 2018, the authors use multiple statistical approaches, including chi-square tests, logistic regressions and category-specific analyses, to examine the relationship between accounting conservatism and CAE patterns. The present methodology controls for firm characteristics, business risk, asset structure and audit quality. Findings Income-increasing CAE significantly outnumbers income-decreasing CAE (59% versus 41%), supporting the proposed hypothesis about systematic bias created by conservative accounting practices. Firm-level accounting conservatism is positively associated with the likelihood of income-increasing CAE. Interestingly, this relationship varies across estimate categories, being primarily driven by revenue-related and compensation-related estimates. Originality/value This paper contributes to the literature by demonstrating how accounting conservatism systematically shapes the directional pattern of CAE disclosures, complementing existing explanations based on opportunistic behavior and business risk. By exploring the temporal dimension of conservatism, the authors enhance understanding of conservatism’s long-term effects on financial reporting and provide practical insights for predicting which firms are more likely to disclose significant estimate changes.