The information content of losses

The information content of losses This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

The information content of losses

Journal of Accounting and Economics, Volume 20 (2) – Sep 1, 1995

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Publisher
Elsevier
Copyright
Copyright © 1995 Elsevier Ltd
ISSN
0165-4101
DOI
10.1016/0165-4101(95)00397-2
Publisher site
See Article on Publisher Site

Abstract

This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests.

Journal

Journal of Accounting and EconomicsElsevier

Published: Sep 1, 1995

References

  • The time-series properties of annual earnings
    Albrecht, W.S.; Lookabill, L.L.; McKeown, J.C.
  • Some time series properties of accounting income
    Ball, R.; Watts, R.
  • 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
    Das, S.; Lev, B.
  • Relevant accounting
    Ronen, J.; Sorter, G.H.

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