CONDITIONAL CONSERVATISM IN THE BRAZILIAN BANKING INDUSTRY IN SITUATIONS OF HIGHER RISK PERCEPTION

Abstract

Studies on conditional conservatism, which assumes asymmetry in the recognition of good and bad news on earnings, are relatively usual in the accounting literature, both internationally and nationally. However, those examining this practice within the banking industry are recent and scarce. This paper attempts to contribute to fill this gap by aiming at verifying whether the accounting earnings of Brazilian banks show evidence of conditional conservatism and, more specifically, whether this practice can be associated to situations of higher risk perception. For performing empirical tests, we use data from the quarterly financial information of commercial, multiple and savings banks from 2001 to 2010. The proxies representing situations of higher risk perception are constructed taking into account periods presenting systemic risk in terms of the Basel Index and the level of capitalization of banks. The evidence obtained confirm the assumption of asymmetry in the recognition of good and bad news, with the postponement of economic profits and the immediate recognition of losses, which corroborates the hypothesis of conditional conservatism in the accounting earnings of Brazilian banks. Expectations towards an increase of this practice in periods of systemic risk and by banks with a lower Basel Index are not confirmed. Yet, when the proxy of a risky situation is based on the book value of capitalization, the tests show a negative association between the timely recognition of economic losses and the level of participation of equity in the capital structure of the institutions