The Link between Information Asymmetry and Conservatism in Financial Reporting

The main goal of this paper is determining the link between information asymmetry among equity investors and conservatism in financial reporting. Becouse we argu that information asymmetry between equeity investors generates accounting conservatism in financial statements. Conservatism reduces the manager's incentives and ability to manipulate accounting numbers and so reduces agency costs that information asymmetry generates. In this paper the Bid-Ask spread and Basu coefficient is used respectively as measures of information asymmetry and conservatism. Our statistical population is the firms listed in Tehran Stock Exchange that examined for the time period 1381 to 1385 by 81 firms as the sample. The results of empirical tests indicate that information asymmetry among equity investors is significantly positively related to conservatism. Further, the results indicate that changes in information asymmetry between equity investors lead changes in conservatism. This result shows that as the consequence of the increase in the information asymmetry between investors, the demand for conservatism increases. These results confirm the usefulness of conservatism as a qualitative characteristic of financial statements.