Executive summary
Previous studies have examined the relation between accounting conservatism and earnings management. Those studies conclude that accounting conservatism reflected in earnings is explained mostly by the accrual component of earnings instead of the cash flow component (Roychowdhury and Watts, 2006 and Pae, 2007). To measure earnings management, the accrual component of earnings is often used. Because of the different nature of accruals at financial firms, in prior research, financial firms were not included into the samples (Pae, 2007, p. 688). This research introduces an approach to examine this relation for banks. The findings indicate that US bank managers use their discretion over
loan loss provisions (large accruals for banks) to manage earnings and influence conditional accounting conservatism into the managements’ desired direction
