6. Conclusion
We examine the relation between life cycle stages of firms and the degree of unconditional reporting conservatism of these firms in the cross-section. Our inquiry is motivated by Givoly and Hayn (2000) and the life cycle theory of firms. Givoly and Hayn (2000) document that financial reporting in the U.S. has become more conservative in the last four decades. Their evidence, however, cannot explain the cross-sectional variation in the degree of reporting conservatism in a given year. The life cycle theory of firms predicts that firms in the introduction stage would invest more heavily in R & D, human capital, organizational change, and capital expenditures to create permanent demand and cost advantages as compared to firms in the mature or decline stage. The immediate expensing of investment in R & D and other intangibles as required by current GAAP, thus, depresses book value of equity of introduction stage firms more severely than that of mature or decline stage firms. On the other hand, the market reward to an equal amount of investment in R & D and capital expenditures is larger for firms in the introduction stage than firms in the mature or decline stage. We, therefore, hypothesize that unconditional reporting conservatism decreases over life cycle stages in the cross-section. We adopt three sets of measures of conservatism from Givoly and Hayn (2000). The first two sets of measures are the level of non-operating accruals scaled by total assets and the market-to-book ratio. These two measures capture accountants' tendency to under-record net assets and reflect unconditional conservatism. The third measure is based on Basu (1997), which captures an asymmetry in reported earnings that reflect “bad news” more promptly than “good news” and reflects conditional conservatism. We classify firms into life cycle stages annually using procedures developed by Dickinson (2011).
