Estudos Draft.docx

In a recent study, Barton and Waymire [2004] provide evidence that managers’ incentives to supply high quality financial statements increase with the level of shareholder-debtholder agency conflicts as proxied by the amount of leverage in the firm’s capital structure. since the firm’s risk increases with the firm’s financial leverage. #### COHEN 2006 / 2019 #### Evidence suggests that higher property costs are associated with a lower quality of accounting information. Evidence of negative association between firm’s total risk and financial reporting quality Significant negative relation is documented between reporting quality and idiosyncratic risk – Maior risco = menor qualidade, outro fator que aumenta a demanda por conservadorismo – A medida que o risco idiossincrático da firma aumenta a qualidade da informação reportada diminui, aumentando assim a demanda por conservadorismo em firmas mais arriscadas. #### colocar que firmas com longo ciclo operacional possuem menor qualidade, todas as métricas e, por isso, conservadorismo seria mais importante, ou elas tendem a ser mais conservadoras ###

BALL E SHIVA 2005 Governance is affected because timely loss recognition makes managers less likely to make investments they expect ex ante to be negative-NPV, and less likely to continue operating investments with ex post negative cash flows. Debt is affected because timely loss recognition provides more accurate ex ante information for loan pricing and more quickly triggers debt agreement rights (such as repricing, and restrictions on leverage, investment and dividends) from violating covenants based on ex post accounting ratios. – Empresas com ciclos mais longos, dada as incertezas inerentes, podem vir a ter custos mais altos de capital, desse fato, os gestores não possuem incentivos para serem conservadores, dado que a antecipação das dívidas aumentaria ainda mais o custo de capital. Timely loss recognition therefore increases managers’ incentives to act quickly to limit economic losses, and thereby increases the efficiency of contracting between firms and managers. – também constrange o deferimento das perdas para períodos subsequentes. the conditional form of conservatism (timely loss recognition) can improve contracting efficiency. It more quickly triggers debt covenant violations that transfer decision rights to lenders, allowing lenders to restrict managers’ actions (such as distributions, borrowing, and new investment) sooner after economic losses become apparent, thereby increasing the efficiency of debt contracting. Similarly, timely loss recognition gives managers less incentive to undertake ex ante negative-NPV projects and more incentive to abandon ex post loss-making investments quickly, thereby increasing the efficiency of compensation contracting and corporate governance.

LaFond and Watts (2008) argue that through their inside information about the firm, managers are encouraged by asymmetric losses to increase profits to transfer to themselves the wealth that would be of the shareholders. Conditional conservatism reduces the informational asymmetry by imposing timely recognition of losses and delaying the recognition of economic gains, which reduces accrual based earnings management successfully (WATTS, 2003; GUAY AND VERRECCHIA, 2006; LaFOND AND WATTS, 2008) and recognizing business losses in due time, informs to the market the inherent risks of a company.

Easley and O’Hara [2004] imply that firms can affect their cost of capital through the precision and quantity of the information they provide investors. Building on the above theory, Francis et al. [2004, 2005] seek to provide evidence consistent with the pricing effects of information quality and claim that accrual quality is a systematic priced risk factor. Theevidence documented in Francis et al. [2004, 2005] suggests that information seems to affect the cost of capital. Cohen (2006 ) following (…) stated that … Following Barone [2002] and Francis et al. [2004, 2005], lower quality financial reporting leads to greater uncertainty and ultimately to higher information risk. – Segundo Dechow, firmas com longos ciclos operacionais possuem menor qualidade e/ou são mais arriscadas, sendo assim, os gestores tendem a ser mais conservadores para mitigar esse risco, dado que o conservadorismo serve pra isso. Leverage is included as an additional explanatory variable since the firm’s risk increases with the firm’s financial leverage. The presence of agency costs gives rise to demand for monitoring. Highly leveraged firms have higher agency costs and thus a greater demand for monitoring. BASU(97)

Conservatism has been an enduring qualitative characteristic of financial reporting for at least five centuries I interpret conservatism as resulting in earnings reflecting 'bad news' more quickly than 'good news. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. I interpret conservatism as capturing accountants' tendency to require a higher degree of verification for recognizing good news than bad news in financial statements. Under my interpretation of conservatism, earnings reflects bad news more quickly than good news. For instance, unrealized losses are typically recognized earlier than unrealized

gains. This asymmetry in recognition leads to systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Asymmetric timeliness in news recognition is expected to manifest itself also as asymmetric persistence in earnings. Since accountants typically report the capitalized value of bad news as losses, bad news earnings is more timely but less persistent. In contrast, good news is reflected in earnings on a less timely basis, but good news earnings tends to be more persistent. Good news earnings is less timely because accountants require more verifiable information before they recognize good news. But good news earnings is more persistent than bad news earnings because the capitalized value of the good news is only partially reflected in current earnings, and after verification, is also reflected in subsequent earnings. I argue that negative earnings changes are asymmetrically less persistent than positive earnings changes because of conservatism arguments). In a world of uncertainty regarding future profits, managers often possess valuable private knowledge about firm operations and asset values. If managerial compensation is linked to reported earnings, then managers have incentives to withhold from reported earnings any information that would adversely affect their compensation. Juliana molina dissertação diz : Basu (1997) examinou as potenciais consequências de um baixo grau de qualidade das informações dos lucros e identificou o seu impacto sobre a assimetria informacional. O autor documentou que esse baixo grau de earnings quality contribui significativamente na assimetria informacional em torno dos anúncios dos lucros nos relatórios contábeis, reduzindo a liquidez nos mercados financeiros, especialmente para empresas em que os ganhos representam a principal fonte de informação para os participantes do mercado.

LA FOND E WATTS 2008 This conservatism is attributed to the use of financial statements in debt and/or compensation contracts, litigation, regulatory and political processes, and taxes (Watts 2003a, 2003b). In the contracting explanations, conservatism occurs because it reduces agency costs associated with (1) asymmetries in information and loss functions among the contracting parties; and (2) an inability to verify the more informed parties' private information In other words, firms with higher information asymmetry between insiders and outside equity investors report more conservative earnings ##MARTINEZ LOPO ESCREVEU - ALTERAR ### Debt covenant hypothesis of positive accounting theory (Watts & Zimmerman, 1986) presented that the closer a company with the violation of credit agreement based on accounting was more allowed the company manager to select the accounting procedure which moved the reported profit from the next period to now. Beatty and Weber (2003) suggests that leveraged firms engage in Earnings Manangement to avoid debt covenant default. ###DECHOW 96 ### First, it is a noisy measure of closeness to covenants, since optimal leverage ratios and the corresponding ratios used in debt covenants are likely to vary as a function of firm characteristics such as the investment opportunity set (e.g.. Smith and Watts 1992). We find that an important motivation for eamings manipulation is the desire to attract external financing at low cost.

The results indicate that important motivations for earnings manipulation are the desire to raise extemal financing at low cost and to avoid debt covenant restrictions.

Finally, our results are consistent with the firms experiencing a significant increase in their costs of capital following the revelation that their eamings have been overstated. This suggests that manipulating eamings initially enables the firms to enjoy lower costs of capital, but that once the earnings manipulation is revealed, the firms experience significant increases in their costs of capital. Nevertheless, we conclude that the desire to raise extemal financing at low cost represents an economically significant motivation for earnings manipulation that has received relatively little attention in previous academic research.

Finally, our results have implications for research into firms' disclosure policies. Existing research argues that there are long-term benefits to building reputations for providing reliable and timely disclosures (Lev 1992; Healy and Palepu 1993; Lang and Lundholm 1993; Botosan 1995; Frankel, McNichols, and Wilson 1995; and Healy, Palepu and Sweeney 1995). Yet the sample of firms investigated in this study chose to risk (and ultimately lose) these benefits for the prospect of short-term gain. Thus, our study highlights the trade-offs that are made in choosing a firm's disclosure policy. Second, leverage ratios are positively related to the demand for external equity financing. In particular, Opler and Titman (1994) show that firms that have high leverage ratios due to large accumulated losses are more likely to issue equity. As a result, leverage ratios are also likely to proxy for the demand for external financing motivation.

BORTON AND WAYMIRE 2004 We examine whether availability of higher quality financial information lessens investor losses during a period seen as a stock market crash. we find that the quality of firms’ financial reporting increases with managers’ incentives to supply higher quality financial information demanded by investors. More conservative financial reporting can enhance information credibility when investors believe that managers might seek to overstate income and net assets for personal gain. Contracting and control conflicts play an important role in managers’ voluntary reporting policies. Conservatism is positively associated with leverage the presence of a potential income measurement conflict that can affect distributions to claimants also is associated with more conservative reporting (ahmed et al 2002) These findings are consistent with a longstanding demand for accounting information based on contracting (Watts, 1977, 2003; Watts and Zimmerman, 1983). As a whole, our findings suggest that managers select financial reporting quality by factoring in investor demand for information. Managers’ incentives to supply higher quality financial statements increase with the level of shareholder–debtholder agency conflicts. (…) Agency conflicts potentially increase with the amount of leverage in the firm’s capital structure, so we predict (dizer> so, its safe to say) that managers of more levered firms will issue higher quality financial reports. LAWRENCE, SLOAN AND SUN (2013) – non discretionary conservatism A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices. Ahmed et al (2002) argue that firms experiencing more severe bondholder-shareholder dividend policy conflicts adopt more conservative accounting

nikolaev 2010 argues that when debt contracts rely on accounting based covenants, bondholders are likely to provide higher incentives for timely loss recognition to the firm's management and its auditors ZHANG 2008 – the contract benefits I document that conservatism benefits lenders ex post through the timely signaling of default risk, as manifested by accelerated covenant violations, and benefits borrowers ex ante through lower interest rates. – fazer ponte com: Higher leverate rations increase interest rations Lenders are also likely to value smoothness, persistence and predictability of earnings, since predictable earnings series generates a steady stream of future interest payment and leads to lower default risk, and smooth earnings series correlate with low risk profie – FAZER PONTE COM CICLO OPERACIONAL / OPERATING CYCLE

WATTS 1993 led to accounting being used to supply information to capital market participants who contract with the firm (e.g., existing shareholders and creditors –– see Watts and Zimmerman, 1983).

KHAN E WATTS 2003 LaFond and Watts (2008) predict that increases in information asymmetry between parties to the firm lead increases in conservatism, rather than conservatism leading information asymmetry. Accounting conservatism is expected to increase with the firm’s likelihood of litigation (Beaver, 1993; Watts, 1993; Basu, 1997; Holthausen and Watts, 2001; Watts, 2003a) Highly levered firms have agency conflicts between lenders and shareholders. Well-known agency problems between these two parties include excessive shareholder distributions, asset substitution, underinvestment and claim dilution.9 Conservatism results in ‘hard’ or verifiable lower bounds for accounting numbers used in debt contracts, thereby constraining opportunistic diversion of resources and triggering debt covenant violations in a timely fashion (Watts and Zimmerman, 1986, pp.213-215; Watts, 1993, p.2; Ball, 2001; Watts, 2003a). This suggests a higher contracting demand for conservatism from more levered firms. Financially distressed firms are more likely to be sued, and the likelihood of financial distress is increasing in leverage, suggesting a higher litigation demand for conservatism from more levered firms. Conclusion: firms with longer investment cycles, and firms with higher idiosyncratic uncertainty are more conservative. THE PERSISTENCE OF ACCRUAL AND INVESTMENT IN OPERATING CYCLE

Hosseinimehr and Nourifard, 2014; The results indicate that the persistence of total accruals, long-term investment and external financing are negatively related to operating cycle As in many studies have been shown, including Sloan (1996) and Xie (2001), low persistence of accruals is due to the poor quality of accounting information and it is

because of the relation between accrual component of earnings and management estimates and predictions which reduces the reliability of information.

Khan e Watts 2009 since conservatism is an efficient governance and contracting mechanism for reducing agency costs generated by those information asymmetries (Watts, 1993; Ball, 2001; Holthausen and Watts, 2001; Watts, 2003a),

Watts and Zimmerman (1990) It is clear there is a relation between firms’ accounting choice and other firm variables, such as leverage All the contracting provisions (including the accounting polices ) are endogenous Garcı´a Laraetal. (2009) find a positive association between recognition and governance characteristics commonly associated with effective monitoring Pae et al. (2005), also using the BKR metrics, find that firm-level price-to-book ratios are a determinant of timely loss recognition and that the negative association is correlated with the accrual component of earnings – LER ESSE ARTIGO !!! pode ser importante pra provar que o lucro é um fator importante no reconhecimento e fazer a relação ciclos longos, discricionariedade e conservadorismo. Ball and Shivakumar (2005), Ball et al. (2008) , Ball et al (2003) e Pae et al (2005)Taken together, all four studies suggesdt that timely loss recognition has an endogenous component related to firms' reporting incentives, primarily equity incentives. Thus, assuming that managers are responding to investor demand for decision usefulness, these studies suggest that equity market perceive asymmetric timeliness as imporving earnings quality. – Posso falar que esses 4 estudos sugerem que o conservadorismo é um componente relacionado aos incentivos das firmas e colocar ( See Dechow e Schrand 2010) – BUSCAR OUTROS QUE FALAM ISSO Dechow et al. 1996 find that manipulation firms have higher leverage ratios and are more likely to violate debt covenants during and after the manipulation period than control firms. – BUSCAR MAIS DESSE TEMA.

### ESCREVER A HIPÓTESE DE FORMA NULA, ASSIM COMO DEVANDRA FEZ NO ARTIGO DELE COM SURESH. - Conservadorismo pra mitigar problemas, porém exise a tendência oportunística dos gestores. a positive relationship with leverage, information asymmetry, corporate age and size, investment opportunities and cash flow changes (Faulkender, 2002);

Leverage captures the debt contracting demand for conservatism leverage IS positively related to asymmetry in the returns distribution (Dutta e Patatoukas, 2017 – Identifying condi ) leverage IS positively related timeless recognition (Collins 2014) – higher leverage higher conservatism According to Watts (2003a), LaFond and Watts (2008) and Khan and Watts (2009), high levered firms are more likely to demand more conditional conservatism levels.

Highly levered firms have more agency conflicts between lenders and shareholders. Firms can minimize these expected agency costs by recognizing bad news as early as possible (MUDAR A FORMA QUE ESTÁ ESCRITA – ISSO VEIO DE WATTS 2003a) higher conservatism is associated with new loan contracts and that levered firms are more conservative when they have higher investment risk Wei and Tao (2007) Considera-se a alavancagem, visto que as corporacoes mais endividadas, ou alavancadas, possuem maiores conflitos de agencia (WATTS, 2003ª ?? – é o B na vdd) e, dessa forma, sao positivamente relacionadas com o conservadorismo e, consequentemente, com a assimetria de informacao.

Em ciclos mais longos é mais fácil o diferimento das perdas, dada a discricionariedade dos accruals dessas firmas ( see Dechow e Dichev, 2002 )

maior

#### size #### Accounting Conservatism and Firm Value: Evidence from the Global Financial Crisis WATTS AND ZUO 2012 We expect Size to be negatively associated with conservatism since larger firms likely have lower information asymmetry. Also, poorer accrual quality is associated with larger cost of debt and equity (see Francis, LaFond, Olsson and Schipper, 2005)