The Impact of Investment Opportunity Set and Profitability on Accounting Conservatism in ASEAN Countries

Abstract

Financial statements deliver critical insights into a company's financial position, adhering to Generally Accepted Accounting Principles (GAAP) and emphasizing conservatism. This principle prioritizes prudence by recognizing costs promptly while delaying revenue acknowledgment, which can potentially distort a company’s true financial health. This research aims to analyze the influence of financial attributes on accounting conservatism, focusing on the investment opportunity set (IOS), leverage, profitability, and firm size in ASEAN's industrial sector. The research comprises a total of 2,968 firm-years, consisting of 424 companies from six ASEAN countries during the period from 2017 to 2023. The data used is sourced from the Refinitiv database obtained from the company's annual reports and employs panel data regression analysis. The research shows that the major independent variable, IOS has no effect on accounting conservatism. Conversely, the independent variable profitability has a positive impact on accounting conservatism. Additionally, two other variables, namely leverage and firm size, have statistically significant impacts on accounting conservatism. This study indicates that an increase in company size correlates with a heightened application of accounting conservatism, whereas greater profitability tends to diminish the application of accounting conservatism within manufacturing firms. The study finds that investment opportunity set does not significantly affect accounting conservatism; profitability, leverage, and firm size influence it differently. It recommends a broader focus and additional variables for comprehensive results.