Asset Specificity and Conditional Accounting Conservatism

32 Pages Posted: 3 Aug 2018

See all articles by Qingyuan Li

Qingyuan Li

Li Xu

Washington State University, Vancouver

Date Written: July/August 2018


Asset specificity, the redeployability of an asset to alternative uses, is a key determinant of an asset's resale value. Asset specificity has a direct impact on a firm's ongoing fair value determination, bankruptcy risk, liquidation value, and abandonment option. We document a significant negative association between asset specificity and conditional conservatism. Further tests reveal that this inverse relation manifests as bad news being less quickly incorporated in earnings as asset specificity increases. We find no difference in the extent to which good news is delayed in earnings for firms conditional on asset specificity. In addition, the documented association is stronger when asset specificity arises from lower within‐industry acquisition activity. The association is also more pronounced for firms that are in less competitive industries, have institutional investors, have limited access to the public debt market, and/or have more unsecured debt. Our findings are noteworthy for regulators and researchers given the recent interest in the determinants of conservatism.

Keywords: asset specificity, conditional conservatism, timely loss recognition

Suggested Citation

Li, Qingyuan and Xu, Li, Asset Specificity and Conditional Accounting Conservatism (July/August 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 7-8, pp. 839-870, 2018, Available at SSRN: or

Li Xu

Washington State University, Vancouver ( email )

14204 NE Salmon Creek Avenue
Vancouver, WA WA 98686-9600
United States

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