DR. JUAN MANUEL GARCIA LARA,

We examine the impact of conditional conservatism on earnings management. Our findings support the view that conditional conservatism reduces accruals-based earnings management but also triggers a trade-off between accruals and real earnings management. We show that, overall, more conditionally conservative firms manage earnings less and, as a result, they are less likely to either marginally or habitually beat earnings targets. Exogenous shocks (the passage of SFAS 131 and the SEC’s short-selling pilot program) provide additional support for our findings. These shocks increased reporting transparency, reducing earnings management. More conditionally conservative firms, however, were only marginally affected, consistent with conditional conservatism already eliciting these transparency effects for them.

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