TY - JOUR

T1 - The impact of climate risk on accounting conservatism: evidence from developing countries

AU - Khalifa, Maha

AU - Zouaoui , Haykel

AU - Ben Othman, Hakim

AU - Hussainey, Khaled

PY - 2024/5/28

Y1 - 2024/5/28

N2 - PurposeThe authors examine the effect of climate risk on accounting conservatism for a sample of listed companies operating in 26 developing countries.Design/methodology/approachThe authors employ the Climate Risk Index (CRI) developed by Germanwatch to capture the severity of losses due to extreme weather events at the country level. The authors use different approaches to measure firm-level accounting conservatism.FindingsThe authors find that greater climate risk leads to a lower level of accounting conservatism. The results hold even after using different estimation methods.Research limitations/implicationsAlthough the authors' analysis is limited to the period 2007–2016, it could be helpful for standard setters such as International Accounting Standards Board (IASB) and International Sustainable Standards Board (ISSB) as they may consider the potential effect of climate risk in their international standards.Practical implicationsThe negative impacts of climate risk on the quality of financial reporting as proxied by accounting conservatism could trigger regulators and standard setters to require disclosure of information relating to climate risks and to incorporate climate-related risks in their risk management systems. In addition, for policymakers, incorporating accounting conservatism as a financial quality reporting standard could help promote greater transparency, accuracy and reliability in financial reporting in the context of climate risk.Originality/valueThe authors add to the literature on international differences in accounting conservatism by showing that climate risk significantly affects unconditional and conditional conservatism. The authors' results provide fresh evidence of the dark side of climate change. That is, climate risk is shown to decrease financial reporting quality.

AB - PurposeThe authors examine the effect of climate risk on accounting conservatism for a sample of listed companies operating in 26 developing countries.Design/methodology/approachThe authors employ the Climate Risk Index (CRI) developed by Germanwatch to capture the severity of losses due to extreme weather events at the country level. The authors use different approaches to measure firm-level accounting conservatism.FindingsThe authors find that greater climate risk leads to a lower level of accounting conservatism. The results hold even after using different estimation methods.Research limitations/implicationsAlthough the authors' analysis is limited to the period 2007–2016, it could be helpful for standard setters such as International Accounting Standards Board (IASB) and International Sustainable Standards Board (ISSB) as they may consider the potential effect of climate risk in their international standards.Practical implicationsThe negative impacts of climate risk on the quality of financial reporting as proxied by accounting conservatism could trigger regulators and standard setters to require disclosure of information relating to climate risks and to incorporate climate-related risks in their risk management systems. In addition, for policymakers, incorporating accounting conservatism as a financial quality reporting standard could help promote greater transparency, accuracy and reliability in financial reporting in the context of climate risk.Originality/valueThe authors add to the literature on international differences in accounting conservatism by showing that climate risk significantly affects unconditional and conditional conservatism. The authors' results provide fresh evidence of the dark side of climate change. That is, climate risk is shown to decrease financial reporting quality.

U2 - 10.1108/JAAR-01-2023-0028

DO - 10.1108/JAAR-01-2023-0028

M3 - Article

VL - 25

SP - 570

EP - 593

JO - Journal of Applied Accounting Research

JF - Journal of Applied Accounting Research

SN - 0967-5426

IS - 3

ER -