(Hanna 2002). The other is that management elects to abandon operations that are not profitable (Hayn1995). While both of these other explanations can explain firm attributes generated by conservatism such as the transitory nature of losses, they cannot individually or jointly explain the systematic understatement assets that is the hallmark of conservatism. The consistency of the evidence in Part II with the various conservatism explanations implies conservatism has a productive role in financial reports providing information to capital market investors. That implication suggests regulators and standard setters should rethink or redirect their opposition to conservatism. CONTRACTING EXPLANATIONS FOR CONSERVATISM Of the four conservatism explanations, I examine the contracting explanation
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