Conservatism and its determinants for Portuguese small and medium entities

Abstract

In this study, we aim at analyzing whether Portuguese small and medium entities (SMEs) are accounting conservatively and what the determinants for conservatism are. While conservatism remains on accounting for a long time, both within the local accounting standards and IFRS firms may opt for a revaluation model to subsequently measure fixed assets. As the number of assets may be carried to higher values than firm becomes less conservative. Therefore, we propose that revaluations are a negative proxy for conservatism. We find that revaluations are not used in an often manner and they are higher for listed than for unlisted firms. Furthermore, our results suggest that debt and firm size are both positively associated with conservatism. Both associations are more significant for listed than non-listed firms. In addition, return on equity tends to increase conservatism, but only for the most indebted unlisted firms. These pieces of evidence are consistent with conservatism being a mechanism to regulate managers’ activity and to capture the confidence of stakeholders.