What drives firm-level differences in conservatism?

This paper addresses the fundamental question of whether there are systematic differences in the level of conservatism across firms. I develop a conceptual framework to identify three components of conservatism - a constant time-invariant component, a firm-specific and time-invariant component and a firm-specific and time-variant component. The conceptual framework explains that recent concerns raised in the literature on whether conservatism and earnings management are two sides of the same coin are mostly driven by this last component of conservatism. By removing discretionary accruals from earnings (effectively this last component of conservatism), the paper documents asymmetric response to good news and bad news. I then construct an over-time firm-specific conservatism index and show that this measure is influenced by the level of competition at an industry level, growth, firm-specific risk and the predictive ability of earnings.