ACCOUNTING CONSERVATISM AND EARNINGS MANAGEMENT: EXPERIENCES FROM THE POLISH CAPITAL MARKET

This study investigates the impact of accounting conservatism on the adopted patterns of earnings management in public companies listed on the Warsaw Stock Exchange. The scope of conditional conservatism was estimated by the occurrence of negative accruals in longer periods and the asymmetry of the relationship between accruals and operating cash flows separately. In turn, the magnitude of earnings manipulation was determined concerning accrual-based and real earnings management behaviours. Our findings confirmed that the magnitude of earnings management in public companies deploying accounting conservatism varies from the extent of earnings manipulation in non-conservative firms. We found that companies applying the prudence concept were, on the one hand, involved in altering earnings downward via accruals, but, on the other hand, they tend to manage earnings upward through real activities. By highlighting how accounting conservatism constrains accrual-based earnings management and signals prudence, our findings can help stakeholders assess managerial behavior, reduce information asymmetry, and evaluate the reliability of reported financial results. The results also highlight how conservative accounting affects both accrual-based and real earnings management in Poland, with variations across sectors, reflecting the country’s specific market characteristics.