Conditional conservatism and persistence of accrual components

We examine whether conditional conservatism affects the persistence of accrual components associated with varying degrees of reliability. Using a sample of 102,416 firm-year observations from 1968 to 2006, we found that conservatism reduces the persistence of more reliable accruals, but not less reliable accruals. Our evidence suggests managers' discretion in practicing conservatism convention may have caused the low persistence of less reliable accruals. Our results inform capital market participants, such as financial analysts, that managers may incorporate more bad news into more reliable accruals than in less reliable accruals, leading to lower persistence of more reliable accruals than less reliable accruals. We expect that analysts can improve forecasting efficiency by understanding the differential implications of accounting conservatism on different accrual components.