THE EFFECT OF ACCOUNTING CONSERVATISM ON THE PERSISTENCE OF EARNINGS OF THE BANKS LISTED ON THE IRAQ STOCK EXCHANGE

Basim Mohammed Merhej

doi:10.61796/ijecep.v3i1.101

Authors

Basim Mohammed Merhej
[email protected]
College of Administration and Economics, Al-Muthanna University, Iraq

Vol. 3 No. 1 (2026): Journal of Economics and Economic Policy

Articles

February 5, 2026

Downloads

VIEW ARTICLE

Abstract
How to Cite
Metrics
References
License

Objective: This study examines whether accounting conservatism is associated with improved earnings persistence of commercial banks listed in the Iraq Stock Exchange (ISX), and whether this association is conditional on (i) the level of corporate governance and (ii) report reforms aligned with IFRS. Method: Based on a balance sheet of publicly disclosed financial statements and reports concerning the governance of financial statements of banks (1987 or later) (2020-2024, Source: Bank for International Settlements). conditional conservatism (ULI). proxied using the accrual-cash flow asymmetric loss recognition framework of Ball and Shivakumar. See earnings persistence using the autoregressive model in which current earnings depend on lagged earnings. Results: The results show evidence of conditional conservatism that is statistically significant with the interaction between operating cash flows and an indicator for the presence of negative cash flows having a positive and significant effect, consistent with loss recognition being more timely when compared to gain recognition. Earnings also have moderate-to-high persistence (positive and significant lagged earnings coefficient less than unity), so that the current earnings have some meaningful information about their future earnings, but are not perfectly permanent. Further analyses indicate that corporate governance reinforces the conservatism-persistence relationship: the conservatism x governance interaction is positive and significant, which is suggestive of stronger monitoring and oversight increasing the degree to which conservative reporting is followed by more sustainable earnings. Finally, IFRS-consistent reform periods are linked to a stronger relationship between conservatism and persistence, as we demonstrate by the presence of a positive and significant effect of the interaction between conservatism and IFRS. Novelty: Collectively, the findings suggest that, in an institutionally changing market like Iraq, conservatism can enhance earnings sustainability, particularly when it is combined with better governance and more sensible reporting regimes.

Merhej, B. M. (2026). THE EFFECT OF ACCOUNTING CONSERVATISM ON THE PERSISTENCE OF EARNINGS OF THE BANKS LISTED ON THE IRAQ STOCK EXCHANGE. Journal of Economic and Economic Policy, 3(1), 168–188. https://doi.org/10.61796/ijecep.v3i1.101

Download Citation

S. Basu, “The conservatism principle and the asymmetric timeliness of earnings,” J. Account. Econ., vol. 24, no. 1, pp. 3–37, 1997.

R. L. Watts, “Conservatism in accounting,” Account. Horizons, vol. 17, no. 3, pp. 207–221, 2003.

R. LaFond and R. L. Watts, “The information role of conservatism,” Account. Rev., vol. 83, no. 2, pp. 447–478, 2008.

M. Khan and R. L. Watts, “Estimation and empirical properties of a firm-year measure of accounting conservatism,” J. Account. Econ., vol. 48, no. 2--3, pp. 132–150, 2009.

R. G. Sloan, “Do stock prices fully reflect information in accruals and cash flows about future earnings?,” Account. Rev., vol. 71, no. 3, pp. 289–315, 1996.

S. A. Richardson, R. G. Sloan, M. T. Soliman, and I. Tuna, “Accrual reliability, earnings persistence, and stock prices,” J. Account. Econ., vol. 39, no. 3, pp. 437–485, 2005.

W. Bank, “Accounting and auditing ROSC: Iraq,” 2010.

I. Foundation, “Use of IFRS Standards by Jurisdiction: Iraq,” 2020.

C. B. of Iraq, “Financial reporting and IFRS implementation,” 2023.

B. Gardi, “Corporate governance and financial reporting quality: Evidence from Iraqi banks,” Sustainability, vol. 15, no. 13, p. 9869, 2023.

J. H. Bliss, Management through accounts. Ronald Press, 1924.

R. Ball and L. Shivakumar, “Earnings quality in UK private firms: Comparative loss recognition timeliness,” J. Account. Econ., vol. 39, no. 1, pp. 83–128, 2005.

R. W. Holthausen and R. L. Watts, “The relevance of the value-relevance literature for financial accounting standard setting,” J. Account. Econ., vol. 31, no. 1--3, pp. 3–75, 2001.

R. M. Bushman and A. J. Smith, “Financial accounting information and corporate governance,” J. Account. Econ., vol. 32, no. 1--3, pp. 237–333, 2001.

J. M. García Lara, B. G. Osma, and F. Penalva, “Accounting conservatism and corporate governance,” Rev. Account. Stud., vol. 14, no. 1, pp. 161–201, 2009.

S. H. Penman, Financial statement analysis and security valuation. McGraw-Hill, 2001.

I. D. Dichev, J. R. Graham, C. R. Harvey, and S. Rajgopal, “Earnings quality: Evidence from the field,” J. Account. Econ., vol. 56, no. 2--3, pp. 1–33, 2013.

P. M. Dechow and I. D. Dichev, “The quality of accruals and earnings: The role of accrual estimation errors,” Account. Rev., vol. 77, no. Suppl., pp. 35–59, 2002.

D. C. North, Institutions, institutional change and economic performance. Cambridge University Press, 1990.

R. Ball, S. P. Kothari, and A. Robin, “The effect of international institutional factors on properties of accounting earnings,” J. Account. Econ., vol. 29, no. 1, pp. 1–51, 2000.

W. H. Beaver and S. G. Ryan, “Biases and lags in book value and their effects on the ability of the book-to-market ratio to predict book return on equity,” J. Account. Res., vol. 38, no. 1, pp. 127–148, 2000.

J. Francis, R. LaFond, P. Olsson, and K. Schipper, “The market pricing of earnings quality,” J. Account. Econ., vol. 39, no. 2, pp. 295–327, 2005.

W. Paek, L. Chen, and H. Sami, “Accounting conservatism and earnings persistence,” J. Accounting, Audit. & Financ., vol. 22, no. 4, pp. 693–722, 2007.

P. M. Dechow, W. Ge, and C. Schrand, “Understanding earnings quality: A review of the proxies, their determinants and their consequences,” J. Account. Econ., vol. 50, no. 2--3, pp. 344–401, 2010.

T. Kravet, “Accounting conservatism and managerial risk-taking: Corporate acquisitions,” J. Account. Econ., vol. 57, no. 2--3, pp. 218–240, 2014.

C. Leuz, D. Nanda, and P. D. Wysocki, “Earnings management and investor protection: An international comparison,” J. financ. econ., vol. 69, no. 3, pp. 505–527, 2003.

P. André, A. Filip, and L. Paugam, “The effect of mandatory IFRS adoption on conditional conservatism in Europe,” J. Bus. Financ. & Account., vol. 42, no. 3–4, pp. 482–514, 2015.

A. Habib, M. M. Hasan, and A. Al-Hadi, “Financial statement comparability and corporate cash holdings,” J. Contemp. Account. & Econ., vol. 15, no. 1, pp. 87–102, 2019.

L. Chen, L. Chen, and H. Sami, “Accounting conservatism, earnings persistence, and pricing multiples,” Account. Horizons, vol. 28, no. 2, pp. 233–260, 2014.

G. W. Ruch and G. Taylor, “Accounting conservatism: A review of the literature,” J. Account. Lit., vol. 34, pp. 17–38, 2015.

C. Ruddock, S. Taylor, and S. Taylor, “Nonaudit services and earnings conservatism,” Contemp. Account. Res., vol. 23, no. 3, pp. 701–746, 2006.

L. D. Brown, H. He, and K. Teitel, “Conditional conservatism and the value relevance of earnings,” Rev. Account. Stud., vol. 18, no. 3, pp. 599–628, 2013.