Dissecting Earnings Recognition Timeliness
Ryan T. Ball
University of Michigan - Stephen M. Ross School of Business
Peter D. Easton
University of Notre Dame - Department of Accountancy
April 12, 2012
Chicago Booth Research Paper No. 11-18
We dissect the portion of stock price change of the fiscal year that is recognized in reported accounting earnings of the year. We call this portion earnings recognition timeliness (ERT). The emphasis in our dissection is on empirical identification of two fundamental precepts of financial accounting: (1) the matching principle, which is manifested in the recognition of expenses in the same period as the related benefits (i.e., sales revenue) accrue; and, (2) recognition of expenses in the current period due to changes in expectations regarding earnings in future periods. The distinction is important because the accounting for these elements (and the associated ERT) differs considerably and it follows that the mapping from returns to these elements, which is the empirical manifestation of ERT, may also differ. The elements of expenses that are matched to sales of the current period and those that are related to expectations of future periods are identified via regressions of annual sales and annual expenses on contemporaneous returns within the fiscal year. The change in the expenses/return coefficient over the year captures the element of expenses that is related to sales of the current year and the end-of-year coefficient captures the expenses that are related to changes in expectations of future sales and future related expenses.
Number of Pages in PDF File: 45working papers series
Date posted: April 15, 2011 ; Last revised: April 13, 2012
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