Assessing the Relationship between Accounting Conservatism and Bankruptcy Risk

Abstract

This paper investigates the relationship between accounting conservatism (both conditional and unconditional) and bankruptcy risk in companies listed on the Tehran Stock Exchange over the period from 2015 to 2022. Using a sample of 86 companies selected through purposive sampling, the study employs panel data analysis and ordinary least squares (OLS) regression to test the hypotheses. The results reveal that both conditional and unconditional conservatism have significant negative impacts on bankruptcy risk, implying that firms practicing conservative accounting are less likely to face financial distress. Additional variables such as firm size, return on assets, and liquidity also show significant negative relationships with bankruptcy risk, while leverage has a positive and significant effect. These findings suggest that larger, more profitable, and more liquid companies are less prone to bankruptcy, whereas those with higher debt levels are at greater risk. The research provides valuable insights for financial managers, auditors, and policymakers, emphasizing the importance of adopting conservative accounting practices and maintaining a balanced capital structure to mitigate bankruptcy risk. The study contributes to the existing literature on financial stability and accounting conservatism, particularly within the context of emerging markets such as Iran.