This paper investigates the impact of investor sentiment on conditional accounting conservatism. We find that companies recognize economic losses more (less) timely in earnings during periods of high (low) investor sentiment. Further, the sentiment-conservatism relationship is stronger for firms with greater sentiment-price sensitivity, which confirms that investor sentiment drives the fluctuation in accounting conservatism observed in the paper. We also show that high investor sentiment increases the probability of subsequent lawsuits, and that the sentiment-conservatism association is stronger for companies with higher litigation risk, suggesting that litigation plays an important role in the sentiment-conservatism relationship. Overall, our results suggest that companies report earnings more conservatively in response to high investor sentiment so as to mitigate negative future outcomes resulting from sentiment.