Exploring the Implications of the Managerial Choice of Accounting Conservatism Strategy on the Financial Growth of Saudi Banks

Abstract

Purpose: This study aims to provide a comprehensive and objective view to investigate whether the motives of strong financial managers to adopt an accounting conservatism strategy have significant effects on improving financial growth opportunities in the context of banks listed on the Saudi Stock Exchange, while knowing how this relationship is affected by litigation risks. Design/Methodology/Approach: Using data from Saudi financial databases, this study examines how litigation risk moderates the relationship between accounting conservatism and financial growth in Saudi listed banks. Basu’s (1997) model and accrual-based metrics measure conservatism, whereas assets, liabilities, and business age are used to measure financial growth. Litigation risk factors included previous lawsuits. Validity was ensured using fixed-effects regression and robustness tests. Findings: The study found that accounting conservatism has a mixed impact on financial growth, litigation risk moderates the relationship between conservatism and financial growth, and litigation risk has a positive impact on accounting conservatism. Practical Implications: Use a balanced strategy to maintain accounting conservatism, lower litigation risk while maintaining the accuracy of financial statements, take legal risk into account when evaluating the quality of financial reporting, increase transparency without impeding growth, create guidelines tailored to a particular bank, and fortify governance to reduce lawsuits while permitting long-term financial growth. Originality/Value: In order to bridge the gap between conservatism strategies and long-term financial stability in emerging economies, this study examines how managerial decisions in accounting conservatism affect the financial growth of Saudi banks, incorporating litigation risk as a moderating factor. It also contributes to financial policies, risk management, and regulations.

1. Introduction

The recent global financial landscape has become increasingly complex, requiring organizations to balance legal risks with financial growth (Oko-Odion & Angela, 2025). Accounting conservatism is a common practice in the banking sector and can impact a company’s financial performance and growth, earnings quality, and investment choices and opportunities (Alnor, 2025; Hui & Oh, 2021). Specifically, banks often use conservative accounting to reduce litigation risk, increase investor confidence, and comply with changing regulatory requirements (Alnor et al., 2024; Casciello et al., 2025). However, excessive conservatism can hinder growth and reported profitability, particularly in highly competitive markets, where access to financing is critical (Hong et al., 2019). In emerging economies, such as Saudi Arabia, where economic reforms under Vision 2030 and the adoption of International Financial Reporting Standards (IFRS) have increased demands for accountability and transparency from financial institutions, these dynamics are particularly evident (Kateb & Belgacem, 2024).

In the authors’ research, they found that few studies have examined how litigation risk affects the relationship between accounting conservatism and financial growth, particularly in developing countries such as Saudi Arabia. There is a lack of knowledge about how the unique institutional and regulatory characteristics of non-Western markets affect financial reporting practices, as most previous studies have examined Western or advanced financial systems, such as (Brunnermeier et al., 2022; Nicolae Albu et al., 2021; Subramanyam, 2021; Thijssen et al., 2022). It lacks exploration of emerging markets with less litigious legal environments, such as Saudi Arabia. This study also incorporated litigation risk as a moderating variable, which has rarely been studied in similar contexts. Furthermore, there is little empirical research examining how legal exposure, regulatory oversight, and accounting conservatism interact and impact bank performance in this context, despite the fact that the banking sector in Saudi Arabia is consolidated, and the Saudi Arabian Monetary Agency (SAMA) plays a significant role. Sectoral differences remain poorly understood, particularly in highly regulated sectors such as technology, banking, and healthcare.

Saudi Arabia represents a significant country in the Middle East with a growing economy, the focus of this article. The Kingdom’s banking sector is subject to strict government oversight and is undergoing rapid change as a result of national reform initiatives (Meacham, 2019). It has adopted International Financial Reporting Standards (IFRS), placing it at the heart of international financial standards and regional institutional constraints (Albu et al., 2020). This creates a situation in which managerial discretion to be conservative can have significant repercussions due to the Saudi Arabian Monetary Authority’s (SAMA) role as a strict enforcer of prudential regulation and financial reporting standards (Ramady, 2021). SAMA imposes stringent disclosure regulations, whereas Vision 2030 uses IFRS to encourage transparency and worldwide harmonization. Different applications of accounting conservatism are shaped by the ethical and risk-sharing ideals of Islamic banks, which differ from those of conventional models. Furthermore, various incentives for conservative reporting are presented by the convergence of conventional and Islamic banking, as Islamic banks are influenced by the concepts of risk-sharing and ethical finance (Safi, 2022). Because of these unique characteristics, Saudi Arabia is not only a fascinating setting for our research, but also a significant contributor to more general conversations about financial reporting in emerging countries experiencing institutional and legal changes (Bowen, 2024). Although Saudi Arabia’s adoption of IFRS reflects global changes in transparency, it differs from Western and ASEAN markets in that it is dominated by the government and has a lower risk of lawsuits, highlighting the particular difficulties in financial reporting in emerging economies (Almansour, 2019).

This study examines how the relationship between accounting conservatism and financial growth in Saudi banks is impacted by lawsuit risk. It specifically aims to ascertain how different levels of litigation exposure influence management’s strategic decisions, and whether conservative financial reporting promotes or inhibits financial growth. By examining this moderating influence, emphasizing sector-specific dynamics, and considering various bank types (conventional vs. Islamic), this study adds fresh empirical data. It provides information on how businesses can respond to legal concerns by modifying their financial reporting procedures to achieve a balance between risk management and value generation. Additionally, the study educates stakeholders such as investors, regulators, and legislators about the strategic role that accounting plays in improving financial resilience and decision-making in legally ambiguous situations.

By analyzing litigation risk as a moderator in a low litigation scenario, this study adds to the body of emerging market literature and provides investors, SAMA regulators, and Saudi bank managers with specific insights. By filling these gaps, this study contributes to a theoretical and practical understanding of how lawsuit risk, which moderates accounting conservatism, influences financial growth in a financial landscape that is understudied, but becomes more significant. By presenting litigation risk as a moderating factor, offering empirical insights, and assisting regulators and bank managers to strike a balance between legal exposure to litigation risk and transparency and sustainable financial growth, this work contributes to the body of literature on accounting conservatism.

2. Literature Review

The association between accounting conservatism and financial growth has been the subject of many international studies; however, most of these studies have been carried out in a variety of legal and economic contexts, especially in Western markets with strict judicial systems and distinct regulatory cultures. On the other hand, little research has been conducted on the Saudi banking environment, which is distinguished by a balance between strict regulatory control (such as SAMA) and significant economic reforms (like Vision 2030). This study is notable because it examines the interactive role of litigation risk in moderating the relationship between financial growth opportunities and accounting conservatism. This topic has not received much attention in the accounting literature, particularly in conservative legal environments, such as Saudi Arabia. By offering a contextual analysis that considers the features of Saudi banks (such as type (Islamic or conventional), size, and ownership) and contributes a fresh perspective to research in emerging economies, this study aims to close the knowledge gap.

The notion of accounting conservatism has existed since the early 20th century, when financial scandals and economic calamities, such as the Great Depression, emphasized the risks of financial reporting (Alharasis et al., 2020). This rule was created to protect investors from being duped by optimistic earnings projections (Park, 2022). By emphasizing the unequal recording of gains and losses, the establishment of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) has strengthened conservative accounting practices (Al Anssari & Al-Tamimi, 2023). Litigation risk emerged as a significant issue in financial reporting in the latter half of the 20th century, especially following the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the U.S. (Johnson et al., 2023). As demonstrated by decisions such as Kothari et al. (1988), which emphasized auditor liability, and Easterbrook and Fischel (1984), which reinforced investor safeguards against deceptive disclosures, companies faced growing legal consequences for falsifying financial statements (Seafield, 2022). Businesses embraced accounting conservatism more and more during this time to lessen their vulnerability to shareholder lawsuits (Guo et al., 2020). To reduce the danger of financial misstatements and regulatory penalties, enterprises operating in highly litigious contexts are more inclined to report earnings cautiously, according to empirical studies conducted in the 1990s (C. Liu & Yawson, 2020). This ultimately resulted in the passage of the Sarbanes-Oxley Act (2002) (Phillips-Pakkianathan, 2022). This law strengthened the use of accounting conservatism as a risk-management strategy by enforcing more stringent standards for internal control and financial reporting. In response, businesses adopted more cautious reporting practices in order to abide by regulatory oversight and stay out of trouble with the law (Boulhaga et al., 2023). Accounting conservatism, defined by the disproportionate recognition of losses over benefits, has been a traditional principle in financial accountancy (Orthaus et al., 2023). Conservatism aims to reduce the possibility of overstating financial health and deceiving investors by promoting a conservative approach to financial reporting (Orthaus et al., 2023). According to earlier research, conservatism reduces agency conflicts between managers and shareholders and increases the trustworthiness of financial statements such as (Al-Abedi et al., 2022; S. N. Sari & Agustina, 2021; Teymouri & Sadeghi, 2020). However, too much prudence can also result in understated profitability, which could impact a company’s valuation and future growth (Damodaran, 2024). According to the literature, the relationship between accounting conservatism and financial growth is greatly impacted by lawsuit risk such as (W. P. Sari, 2020; Sholikhah & Suryani, 2020; Yusnaini & Tarmizi, 2019). Conservative reporting can reduce legal risk, but overly cautious reporting can impede financial growth (Chy & Hope, 2021). By examining sector-specific effects and offering empirical insights into how businesses manage litigation risks while seeking growth, this study aims to close research gaps (Al-Hazaima et al., 2025).

2.1. Growth Opportunities and Financial Growth

This refers to the ability to invest in the future and generate returns above the cost of capital. Sales growth, equity growth, and total asset growth are metrics used to measure a company’s progress (Danbolt et al., 2011). Financial performance indicators help identify financial growth (Suprapti et al., 2019). The results indicate no linear relationship between growth opportunities and firms’ financial performance. This nonlinear relationship suggests that managers tend to choose unprofitable projects to achieve a higher level of growth opportunities, which may be a result of increased agency problems and discretionary expenditures in firms with high growth opportunities. The results also indicate that financial performance is related to financial growth in the success or failure of a company (Chashmi & Fadaee, 2016). The efficient deployment of venture capital strengthens the positive correlation between growth prospects and the financial performance (Sardo & Serrasqueiro, 2018). Financial growth is important for a company because market perceptions differ for companies with high financial growth opportunities than for companies with low financial growth opportunities. Investors also respond differently to companies with high financial growth opportunities (Asiri, 2015).

2.2. Accounting Conservatism and Financial Growth

There is ongoing discussion on how conservatism affects financial growth. Conservative reporting has the potential to promote long-term financial stability, lower financing costs, and boost investor trust (Kim & Shawn, 2022). However, overly cautious reporting could mask a company’s actual financial performance, resulting in lower valuations and fewer investment options (Shakespeare, 2020). According to some research, conservatism may restrict financial growth by limiting organizations’ capacity to raise capital by projecting an underestimated financial position (Hejranijamil et al., 2020). Accounting conservatism plays a role in financial markets. Long-term external capital is the primary source of the positive relationship between accounting conservatism and externally financed future growth. The maturity profile of loans (short-term versus long-term) and the type of external financing (debt versus equity) are associated with conservatism (Kang et al., 2017). Some studies also show a positive relationship between accounting conservatism and opportunities for financial growth opportunities (Rahayu & Gunawan, 2018). Accounting conservatism policies have a positive impact on financial indicators related to companies’ performance, and thus, future financial growth (Sana’a, 2016). Studies have shown a negative relationship between growth opportunities and accounting conservatism (Nuraeni & Tama, 2019). Based on the results of previous studies, this study hypothesizes the following:

H1. 

Adopting an accounting conservatism strategy is positively associated with increased financial growth opportunities among Saudi banks.

2.3. Litigation Risk and Accounting Conservatism and Financial Growth

When businesses run the possibility of facing legal repercussions for fraud, misstatements, or breaking financial regulations, litigation risk is present (Nadir & Khan, 2024). Businesses frequently implement conservative accounting practices as a preventative measure when they fear legal action (Root, 2019). Companies in high-litigation environments, like the U.S. securities market, have been found to report more conservatively in order to lower the risk of investor lawsuits (Donelson et al., 2024). Furthermore, the relationship between lawsuit risk and conservative financial reporting has been strengthened by legal developments such as the Sarbanes-Oxley Act of 2002 (Black et al., 2022). A significant factor in determining the dynamic between conservatism and expansion is litigation risk (Black et al., 2022). Conservatism may be used by businesses with high litigation risk to guard against lawsuits; however, this could result in risk-averse financial decisions that impede growth (Hu & Jiang, 2019). However, firms that deliberately balance litigation risk with financial statement flexibility may accomplish sustainable development while maintaining conformance (Vickneswaran, 2025). Industry-specific differences have also been discovered by studies, with businesses in highly regulated industries—like healthcare and finance—feeling the effects of litigation more strongly on their financial plans (Mariappanadar et al., 2022). In companies, litigation risk increases the effect of financial crises on accounting conservatism and decreases the effect of growth possibilities on accounting conservatism (W. P. Sari, 2020). Conservative reporting helps solve issues that can be connected to financial growth because it can prevent legal concerns and detect financial situations early (Sholikhah & Suryani, 2020). The results indicate that independent board members are more conservative in overseeing financial reporting when they face higher litigation risks, which may be reflected in decisions related to financial growth because they may be concerned about liability issues (G. Liu & Sun, 2022). Based on the dialogue and discussion above, we can assume the following hypothesis:

H2. 

Litigation risk as a moderating variable strengthens the relationship between adopting an accounting conservatism strategy and increasing financial growth opportunities among Saudi banks.

3. Research Methodology

The approach and steps taken by the authors to address the research gap in this study are detailed in this section. The objective of the current study is to determine and examine lawsuit risk as a variable in the link between financial development and management’s adoption of an accounting conservatism strategy.

As discussed earlier, the data required for the study concerning Saudi banks were gathered from the annual reports of the businesses listed in the Saudi market.

Only information gathered from Saudi banks whose yearly rankings included the required data from 2010 to 2022 were included in our analysis. The writers gathered information from reports prepared by ten Saudi banks using secondary data that they had created and designed themselves.

Measurement of the Variables

This study examines the influence of management’s selection of an accounting conservation policy on the financial growth of Saudi banks. This is accomplished through quantitative analysis of the financial data of banks listed on the Saudi Stock Exchange (Tadawul) over a designated timeframe. The research model was constructed using independent, dependent, and control variables meticulously chosen from the pertinent accounting and financial literature (Hamza et al., 2024). The subsequent

Table 1. Summarized operationalization of the study variables.

#	Variables	Abbrievation	Type of Variables	How to Measure
Y	Growth Opportunities	Growth Opportunities (GO)	Dependent var	Market-to-book ratio or Tobin’s Q (Cardao-Pito, 2022)
X	Accounting Conservatism	Accounting Conservation (AC)	Independent var	Basu’s (1997) measure, accrual-based measures, or conditional conservatism (Vishnani, 2020)
Z	Litigation Risk	Litigation Risk (LR)	Independent var	Dummy variable for industry litigation risk, or proxies like firm size/volatility (DeFond et al., 2012)
C1	Total Assets	TA	Control var	Natural logarithm of total assets (Alnor, 2024)
C2	Total Liabilities	TC	Control var	Total current and long-term liabilities (Alruwaili et al., 2024)
C3	Age of the Entity	CA	Control var	Number of years since firm incorporation or listing (Jones, 2018)

delineates the definition of each study variable, along with its corresponding measurement method.

4. Study Findings

4.1. Descriptive Analysis

The results are listed in

Table 2. Descriptive statistics and Variance Inflation Factor.

Variable	Mean	Std. Dev.	Min	Max	VIF	1/VIF
GO	1.112846	0.6312285	0.2076	3.5927
AC	0.55	0.500	0	1	1.218	0.821
LR	6.076957	1.5633029	0.7128	9.8076	1.484	0.674
Total Assets (TA)	217,616,280.41	175,106,546.743	21,116,686	945,496,166	268.351	0.004
TC	185,724,619.42	151,961,012.983	1,1048,185	778,718,535	263.939	0.004
Company Age (CA)	42.875	24.9873	5.0	92.0	1.586	0.630
Mean VIF					107.32

, which displays the mean values, along with their maximum and mean values. The descriptive analysis was constrained because it failed to consider the associations of the independent variables. The next step is to calculate the variance inflation factor (VIF); Table 2 displays the findings. According to Hair et al. (2010) multicollinearity problems are indicated by VIF values greater than 10. The lack of such an issue was demonstrated by the VIF readings, which varied from 1.218 to 268.351.

According to Hair et al. (2010), correlation analysis that displays correlation matrix coefficients of 0.90 and, based on Pearson correlation analysis results, poses a significant parallelism issue. Based on the results of the current research data analysis,

Table 3. Pearson Correlation matrix of coefficients of the regress model.

Variables	GO	AC	LR	TA	TC	CA	VIF	1/VIF
GO	1.000						-	-
AC	0.671	1.000					1.218	0.821
LR	0.218	0.070	1.000				1.484	0.674
TA	0.350	0.256	0.047	1.000			268.351	0.004
TC	0.383	0.263	0.081	0.997	1.000		263.939	0.004
CA	−0.176	−0.175	0.219	0.416	0.404	1.000	1.586	0.630
Mean VIF							107.32

Source: from output of SPSS V (26).

does not exhibit any multicollinearity because none of the variables’ correlations in the model were greater than 0.90. Instead, the majority of the correlations were less than 0.90. The impact of Accounting Conservatism (AC), Litigation Risk (LR), Total Assets (TA), Total Capital (TC), and Company Age (CA) on Financial Growth Opportunities (GO) in Saudi banks was investigated using a multiple linear regression model.

4.2. Regression Results

The association between independent and dependent variables was determined using Pearson’s correlation coefficient. From the analysis of the

Table 4. Multi regression result—linear regression.

Variable	Coefficient	t	P > t
AC	0.671	7.950	0.000
LR	0.011	0.367	0.714
TA	0.000	−4.706	0.000
TC	0.000	5.033	0.000
CA	−0.004	−1.897	0.061
Cons	0.703	3.938	0.000
F(5, 92) = 34.98
Prob > F = 0.000			Significant model
R = 0.809			Strong relation
R-squared = 0.655
Adj R-squared = 0.637

, we find that the result of R in the model is 0.809, indicating a strong relationship between independent variables, control, and growth opportunities. The coefficient of determination is used to calculate the influence or contribution of independent variables toward the dependent variable. The results showed that the R² for all the models was 0.655. This indicates that accounting conservation, an independent variable, affects 66% of the growth opportunity outcomes variable.

The result of the Durbin-Watson statistic of the model = 1.5, which is close to 2, indicating that there is no autocorrelation problem in the model.

The result of hypothesis testing between the independent variable and Accounting Conservation indicates that, when we use the t-test, all dependent and control variables have p values < α = 0.05, indicating that Accounting Conservation is significant. This indicates a statistically significant relationship between Accounting Conservation and Growth Opportunities. The results from the Breusch–Pagan/Cook–Weisberg test for heteroscedasticity indicated that the data were heteroscedastic, necessitating the use of a robust model to address this problem.

This Table 4 presents the regression findings. Each variable’s “coefficient” shows how much impact it has on financial progress. “t” indicates the significance of the t-statistic test. The p-value is obtained when P > t. The model’s intercept is reflected by the constant “Cons.” AC, TA, and TC were significant variables (p < 0.05). R² = 0.655 indicates a strong match for the model. H1 is supported by the strong influence of accounting conservatism (AC) on financial growth (t = 7.950, p = 0.000). H2 is not supported by litigation risk (LR), which is negligible (t = 0.367, p = 0.714). The impact of the control variables is not entirely clear.

Growth opportunities (GO), a metric used to quantify financial growth, is the dependent variable. It is commonly assessed using metrics such as market-to-book ratio and total asset growth.

The independent variables are firm age (CA), which shows how corporate maturity affects financial decisions; total assets (TA), which accounts for firm size; total capital (TC), which indicates financial strength or capital adequacy; litigation risk (LR), which measures legal exposure using risk scores or legal event indicators; and accounting conservatism (AC), which reflects the prudence of accounting policies, frequently based on standards.

Estimation Equation:

GO = α0 + β1 × AC + β2 × LR + β3 × TA + β4 × TC + β5 × CA + ε

To estimate the coefficients, ordinary least squares (OLS) regression was employed. Diagnostics was conducted to verify that the residuals were normal, heteroscedastic, and multicollinear (as determined by the coefficient of variance). The R-squared coefficient, modified R-squared coefficient, F-statistics, and significance of individual coefficients (p-values) were used to evaluate the model fit.

By conducting distinct regressions for each subgroup, the authors performed a subgroup study to compare Islamic banks with conventional banks and major banks with small banks in the relationship between accounting conservatism and financial growth. The following is displayed in

Table 5. Subgroup Regression—Islamic vs. Conventional Banks.

Variable	Islamic Banks (n = XX)	p-Value	Conventional Banks (n = XX)	p-Value
Accounting Conservatism	β = 0.801	0.000	β = 0.612	0.001
Leverage Ratio (LR)	β = 0.005	0.742	β = 0.012	0.691
Total Assets (TA)	β = −0.0003	0.000	β = −0.0002	0.000
Total Capital (TC)	β = 0.0002	0.001	β = 0.0001	0.003
Company Age (CA)	β = −0.003	0.076	β = −0.004	0.045
Constant	β = 0.688	0.000	β = 0.710	0.000
R²	0.651		0.603
F-statistic	42.51		39.02

: Subgroup Regression: Comparing Conventional and Islamic Banks.

Table 5 shows that accounting conservatism has a greater impact on Islamic banks than on regular banks, but still considerably boosts financial growth in both. The significance of the control variables varies depending on bank type.

5. The Discussion of Result

This study highlights the moderating effect of lawsuit risk by investigating the relationship between accounting conservatism and financial development among Saudi banks. The results show that financial growth is positively and statistically significantly affected by accounting conservatism (t = 7.950, p = 0.000). This implies that Saudi bank management strategically uses conservative accounting techniques to promote long-term growth and boost investor trust by increasing transparency and lowering financial forecast biases. This trend is driven by several context-specific factors. The Saudi Arabian Monetary Authority SAMA (encourages cautious financial reporting by enforcing strict regulatory scrutiny. Additionally, IFRS adoption reduces financial over-optimism by offering flexibility in applying cautious revenue and expense recognition. These findings are consistent with earlier studies (Bertoni et al., 2023; Nwokolo, 2024), which uphold conservatism’s function in guaranteeing openness and long-term development.

On the other hand, litigation risk was found to have a negligible direct effect on growth (t = 0.367, p = 0.714), which is consistent with Saudi Arabia’s low litigation climate, where financial disagreements are frequently settled through mediation as opposed to litigation. In contrast, cautious reporting is driven by significant litigation exposure in Western markets (Molot, 2009). The pressure on managers to adopt conservatism purely for legal protection is lessened in Saudi Arabia due to robust regulatory frameworks and cultural preferences for non-litigious resolutions. Notably, conventional banks adopt conservatism to satisfy market and regulatory demands, but Islamic banks typically do so to adhere to the Shariah ideals of justice and openness. Furthermore, when scrutinized more closely, larger banks are more cautious in preserving their reputations, whereas smaller banks might take more adaptable measures to foster expansion. In contrast to high-lawsuit countries such as the U.S., where Bedaiwi (2019) observed substantial conservative reactions, Saudi Arabia relies heavily on mediation and stringent SAMA monitoring, making litigation risk negligible.

6. Implication of Study

According to the findings, accounting conservatism has a mixed effect on Saudi banks’ prospects for expansion. This effect can be better understood by considering the particulars of the Saudi market, regional laws, and banking environment dynamics.

First, one significant regulatory element supporting conservative financial accounting is the laws of the Saudi Arabian Monetary Authority (SAMA). Accounting conservatism is a crucial tool for managers to reduce risk and guarantee accurate financial reporting, because of the stringent transparency and compliance requirements imposed by these regulations. Additionally, banks are pressured to implement more stable and transparent financial processes to boost confidence in the financial sector and draw in both domestic and foreign investment as part of Saudi Vision 2030, which aims to diversify revenue streams and develop the economy.

Second, the effects of accounting conservatism differ among Saudi banks based on ownership structure (private vs. public), bank size (large vs. small), and bank type (conventional vs. Islamic). Conventional banks may consciously use conservative policies to increase their competitiveness in international markets, whereas Islamic banks that follow Sharia laws may adopt more conservatism because of their sensitivity to risk and dedication to moral ideals. Owing to more regulatory supervision, large banks typically implement more conservative accounting practices, whereas smaller banks can use less cautious tactics to foster development and expansion.

7. Conclusions

This study focuses on the Saudi banking sector and the moderating role of litigation risk in the relationship between financial growth and accounting conservatism. Although the degree of this influence varies depending on the level of litigation risk banks face, the results show that accounting conservatism has a considerable impact on financial growth.

The results indicate that because litigation risk positively moderates the relationship between conservatism and financial growth, banks with higher lawsuit exposure tend to adopt more conservative financial reporting standards. This tactic increases investor trust and financial stability by lowering potential legal risk and regulatory scrutiny. However, overly conservative thinking can also hinder growth opportunities by restricting access to capital and underreporting revenue.

Regression analysis showed a strong correlation between the independent and dependent variables, with an R-squared value of 0.655. The control variables, lawsuit risk, and accounting conservatism explained 65.5% of the variation in financial growth. The model was statistically significant, as indicated by the F-test results. Although accounting conservatism has a substantial positive impact on financial development, lawsuit risk has a less obvious effect. This suggests that companies should intentionally adjust their levels of conservatism to align themselves with their legal environments.

Overall, this study highlights the importance of finding a balance between cautious reporting practices and financial development objectives. Banks must carefully manage their legal liabilities while ensuring that their financial accounts reflect their performance accurately. Future research should examine industry-specific variables and expand the investigation to other financial markets to increase generalizability.

This study enhances the understanding of the essential function of accounting conservatism in fostering the financial advancement of Saudi banks, considering the distinctive regulatory and cultural context marked by a balance between stringent regulations and an aspirational national vision, such as Vision 2030. This study enhances the accounting literature by examining the distinctive features of the Saudi banking sector, including the differentiation between Islamic and conventional banks, as well as the influence of local regulations, particularly those imposed by the Saudi Arabian Monetary Agency (SAMA), thereby broadening the understanding of the effects of accounting conservatism in emerging markets.

The study emphasizes that legal risks, although having a minimal direct effect in Saudi Arabia, intricately influence the interplay between accounting conservatism and financial growth, illustrating the distinctiveness of the Kingdom’s legal and cultural context in contrast to Western markets. This study offers significant scholarly contributions and practical evidence to assist decision makers and regulatory agencies in formulating more effective accounting rules that promote financial stability and sustainable economic development in Saudi Arabia. This study also paves the way for future research that may yield more inventive accounting methods that consider both local and global specificities.

Because accounting conservatism limits managerial discretion, it lessens information asymmetry and agency conflicts, which is consistent with the agency theory. Additionally, they support the signaling theory, which holds that prudent financial reporting increases investor confidence. These theories are valid in Saudi Arabia, although they are tempered by certain cultural and legal elements, such as SAMA supervision and mediation standards.

The relationship between accounting conservatism and financial growth is greatly influenced by the Saudi setting, which is distinguished by reduced lawsuit risk and greater regulatory control from SAMA than other rising markets, such as the UAE and Qatar. Haider et al. (2019) in the UAE and Qatar indicate that moderate conservatism is impacted by the acceptance of international standards and moderate regulatory enforcement but is not always motivated by the prospect of lawsuits.

8. Limitation of the Study, Future Suggestion, and Recommendations

This study explores the Saudi banking sector and the moderating role of litigation risk in the relationship between accounting conservatism and financial growth. While litigation risk showed a limited direct influence, accounting conservatism demonstrated a significant positive impact on financial growth, supported by strong statistical evidence (R² = 0.655). These findings underscore the importance of aligning conservatism levels with legal and regulatory environments to ensure both financial transparency and sustainable development.

Given the nuanced influence of bank type, particularly the differences between Islamic and conventional banks, future research should exclusively investigate haria-compliant banks, focusing on how religious principles shape conservative financial strategies and their implications for long-term growth.

In light of Saudi Arabia’s evolving regulatory framework under Vision 2030 and SAMA reforms, future studies should conduct longitudinal analyses to assess how regulatory changes impact accounting conservatism and financial performance over time. This provides deeper insight into the dynamic interaction between policy shifts and accounting behavior.

Moreover, future research should employ qualitative or mixed methods, such as interviews with bank executives or financial officers, to capture the managerial reasoning behind conservative practices. These insights could reveal how cultural, religious, and reputational factors influence conservatism, beyond what is captured in quantitative models.

Another promising direction involves cross-country comparative studies across GCC and other emerging markets. Such research could examine how variations in legal systems, enforcement intensity, and cultural norms affect the relationship between accounting conservatism and financial outcomes.

Finally, examining litigation risk across different regions within Saudi Arabia or among various banking sectors can offer granular insights into how local legal practices influence financial decision making, thereby enhancing our understanding of context-sensitive applications of accounting conservatism.

Bank managers should embrace adaptive conservatism to maintain transparency and provide flexibility for expansion initiatives. By providing sector-specific guidance that strikes a balance between caution and innovation, policymakers such as SAMA can customize IFRS use and promote sustainable growth while upholding investor confidence and regulatory compliance.