Income Adjustments and Firm Performance During Economic Downturns: Systemic Versus Opportunistic Conservatism

ABSTRACT This study examines how accounting conservatism affects income adjustments and firm performance during economic crisis periods, distinguishing between systemic conservatism versus opportunism. We find firms practicing conservative accounting in stable periods are less likely to make large income‐decreasing accounting adjustments during crises compared to non‐conservative firms. Conservative firms also show better earnings and market returns, indicating prudent preparation for future economic uncertainty. These benefits are driven by systemic conservatism, while opportunistically conservative firms are penalised. Our findings contribute to the longstanding discussions amongst standard‐setting bodies and other stakeholders about prudence, opportunism, and bias over the past four decades.