Abstract

http://ssrn.com/abstract=1840744
 
 

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The Asymmetric Market Valuation of Nonrecurring Items and Accounting Conservatism


Richard Zhe Wang


Eastern Illinois University

Madeline Kay Trimble


University of Mannheim

May 13, 2011


Abstract:     
This paper investigates the asymmetric market valuation of negative and positive nonrecurring items as explained by accounting conservatism. We argue that special items, also known as nonrecurring operating gains and losses, have asymmetric market valuations, as proxied for by the earning response coefficient (ERC). This paper has two main findings: (1) an asymmetry exists in the valuation of positive and negative special items; and (2) the asymmetry can be explained by the idea of accounting conservatism, which is the tendency that firms report economic losses on a timelier basis than economic gains. The above two findings are supported by our empirical tests, which show that negative special items are more value relevant (i.e. have a higher ERC) than positive ones due to the fact that nonrecurring losses are impounded in earnings much quicker than nonrecurring gains. Thus, negative and positive special items are not valued equally by investors - an asymmetry exists. Furthermore, as the level of conservatism increases within a firm, this asymmetry of market valuation becomes larger, signifying that the value relevance of negative special items increases at a rate greater than that of positive special items.

Number of Pages in PDF File: 23

Keywords: special items, value relevance, accounting conservatism, C-Score

JEL Classification: M40, M41

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Date posted: May 15, 2011 ; Last revised: July 19, 2011

Suggested Citation

Wang, Richard Zhe and Trimble, Madeline Kay, The Asymmetric Market Valuation of Nonrecurring Items and Accounting Conservatism (May 13, 2011). Available at SSRN: http://ssrn.com/abstract=1840744 or http://dx.doi.org/10.2139/ssrn.1840744

Contact Information

Richard Zhe Wang (Contact Author)
Eastern Illinois University ( email )
Charleston, IL 61920-3099
United States
Madeline Kay Trimble
University of Mannheim ( email )
Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany
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