The Role of Social Values, Accounting Values and Institutions in Determining Accounting Conservatism

The extant literature on cross cultural differences in conservatism finds that a mix of institutional and economic variables influences differences in the level of conservatism across countries. Using the modified Gray model Doupnik and Tsakumis (J Acc Lit 3(1): 1–20, 2004) we examine whether societal values are a neglected explanatory factor for differences in levels of accounting conservatism across countries. Both unconditional and conditional conservatism are measured. Social values are measured using both a composite value for conservatism Hope et al. (J Acc Public Policy 27(5): 353–357, 2008) and individual values from Hofstede and Hofstede in Cultures and organizations: Software of the mind (2nd ed., New York, McGraw-Hill, 2005). A test sample of 89,481 firm-years from 1989 to 2006, compressed to 341 (or 342) country-year observations from 22 countries provides the data for OLS regressions. We find that after controlling for previously documented legal and financial institutional variables, both conditional and unconditional accounting conservatism are greater in countries with more conservative societal and accounting values. The Hofstede value of femininity (the importance of caring for others) is also significant for both measures of conservatism. These findings provide a more complete model for further testing of accounting conservatism and other topics using societal values. They also provide support for the modified Gray model using archival data. Finally, while both dimensions of conservatism matter and while they share some common explanators, both have unique additional influencing factors in culture and institutions.