How to Improve on the Gray’s Index for Accounting Conservatism

Abstract

The Gray’s index has been used to compare accounting variables such as earnings in a sample of financial accounting figures since its introduction by Gray (Gray, S. J. 1980. “The Impact of International Accounting Differences from a Security-Analysis Perspective: Some European Evidence.” Journal of Accounting Research 18 (1): 64–76), in view to indicate the relative degree of accounting conservatism between sets of accounting standards. This note aims to improve on this index especially when variables under investigation can be negative. In the latter case, proportionality between the two variables may be hidden by its application. We suggest therefore some amendments to better show this proportionality and improve on statistical comparison of accounting figures generated by alternative sets of accounting standards.