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status, audit firm organizational form, post accounting scandal period (e.g., Enron, Procomp)
and the impact of CPA discipline. These findings support the litigation explanation for
conservatism (Watts, 2003a).
5. Conclusion and Future Research Direction
This paper reviews the accounting conservatism papers covering Asia. We suggest the
following future search opportunities.
First, future research could examine the connection between information intermediaries
and conservatism. For example, do sell-side debt analysts appreciate accounting
conservatism? Does conservatism affect the coverage and recommendation behavior of debt
analysts? How, if at all, do sell-side equity and debt analysts incorporate conservatism into
their forecasts? Second, even if borrowers commit to being conservative, how do lenders
interpret this pledge and verify that it is met? Third, most studies emphasize that
conservatism can alleviate information asymmetry ex-ante and monitor agents (e.g.,
managers) ex-post. However, in practice, lenders can achieve the same goals through other
mechanisms. For example, bankers on boards, soft information during credit analysis,
convertible bonds, covenants and collateral can all be used to reduce information asymmetry.
What is the connection between these mechanisms and conservative accounting?