An Empirical Analysis of Accounting Conservatism and Its Effect on Corporate Financial Performance in Iraq Industrial Sector

Abstract

Accounting conservatism is a crucial factor of financial performance of firms, especially in the emerging economies where financial reporting and corporate governance are still in their developmental stages. The article under consideration examines the question of whether accounting conservatism improves financial performance in the Iraqi industrial sector. In particular, it explores the impact of accrual-based conservatism, asymmetry timeliness (Basu model), negative earnings persistence, and market-to-book ratio on such key performance measures as Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), and the Tobin Q.  The researcher adopts a quantitative methodology based on panel data of twenty-five industrial companies listed on the Iraq Stock Exchange, and the time frame of 2018-2024.  The board independence, leverage, ownership concentration, sales growth, firm age, and the inflation are the control variables.  The Generalized Method of Moments (GMM) was used to overcome the endogeneity and give the best estimation.  The results indicate that asymmetric timeliness and negative earnings persistence play a major role in determining financial performance, which indicates that conservative accounting practices can limit and stabilise firm performance. Moreover, the governance variables, particularly, ownership concentration and leverage, have a significant influence on the performance of firms. The findings prove the model validity by J-statistics and AR tests.  This study offers important lessons to policymakers, regulators and corporate executives by highlighting the fact that conservatism in accounting, when coupled with proper governance structures, can reinforce financial performance and increase the value of firms in transitional economies like Iraq.