Understanding discretion in conservatism: An alternative viewpoint

Various studies have investigated variation in reporting conservatism with pre-specified contractual incentives. Lawrence et al. (forthcoming), hereafter LSS, propose a model to control for “normal” or “non-discretionary” conservatism while testing for variation in conservatism with contractual forces, which they characterize as “discretionary” variation. Our objective is to further the discussion on discretion in conservatism by relying on LSS and incorporating insights from related studies to shed light on the rationales and relative importance of various controls for normal conservatism suggested by LSS. Furthermore, our perspective on discretion in conservatism is distinct from the one developed by LSS in some crucial respects, ultimately leading us to question the nature of the boundary between discretionary and non-discretionary conservatism.