The conservatism principle and the asymmetric timeliness of earnings 1

The conservatism principle and the asymmetric timeliness of earnings 1 I interpret conservatism as resulting in earnings reflecting ‘bad news’ more quickly than ‘good news’. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms’ stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. ¢ 1997 Elsevier Science B.V. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

The conservatism principle and the asymmetric timeliness of earnings 1

Journal of Accounting and Economics, Volume 24 (1) – Dec 1, 1997

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Science B. V.
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(97)00014-1
Publisher site
See Article on Publisher Site

Abstract

I interpret conservatism as resulting in earnings reflecting ‘bad news’ more quickly than ‘good news’. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms’ stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. ¢ 1997 Elsevier Science B.V. All rights reserved.

Journal

Journal of Accounting and EconomicsElsevier

Published: Dec 1, 1997

References

  • Some time series properties of accounting income
    Ball, R.; Watts, R.
  • Mandated accounting changes and managerial discretion
    Balsam, S.; Haw, I.; Lilien, S.B.
  • Conservatism and the asymmetric timeliness of earnings
    Basu, S.
  • Further evidence of the time series properties of accounting income
    Brooks, L.; Buckmaster, D.
  • Nonlinearity in the returns-earnings relation: tests of alternative specifications and explanations
    Das, S.; Lev, B.
  • Valuation and clean surplus accounting for operating and financial activities
    Feltham, G.; Ohlson, J.A.
  • The information content of losses
    Hayn, C.
  • Dividend policy under asymmetric information
    Miller, M.H.; Rock, K.

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