Empirical Study on the Relationship Between Conditional Conservatism and Bankruptcy Risk in the Companies Listed in Tehran Securities Market

Financial information exerts variable economic effects. The study of economic impact of information depends on the measurement methods through which information is measured. The economic impacts of conservative measurements lead to two designations of accounting conservatism – conditional and unconditional. Each category has a different informational content for stakeholders in terms of the earnings quality, expected rate of return and financial flexibility. The present study investigates the association between conditional conservatism and bankruptcy risk in the companies listed in Tehran securities market. The study also investigates the effect of conservatism on the capital market, aiming to determine the role of conservatism in accounting concerning the components of conservatism (conditional and unconditional). Accounting conservatism refers to more timely reception of bad rather than good news on earnings. Conditional conservatism is distinct from unconditional conservatism that involves the net book value of assets estimated lower than their real value as well as immediate spending of the majority of intangible assets. The results showed a significant correlation between bad news and the capital market. In other words, bad news (versus good news) exerted a more significant effect on the capital market. The study also revealed a significant correlation between conditional conservatism and bankruptcy risk. That is, increased risk of bankruptcy decreased the levels of conditional conservatism.