Abstract

http://ssrn.com/abstract=1920356
 
 

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Information Consequences of Accounting Conservatism


Juan Manuel García Lara


Universidad Carlos III de Madrid - Department of Business Administration

Beatriz Garcia Osma


Universidad Autonoma de Madrid

Fernando Penalva


IESE Business School - University of Navarra

December 10, 2013

European Accounting Review, Forthcoming

Abstract:     
We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to subsequent decreases in information asymmetries between firm insiders and outsiders. We predict and test if this decrease in information asymmetries manifests itself through: (a) a decrease in the bid-ask spread and in stock returns volatility, and (b) an improved information environment for financial analysts, leading to more precise and less dispersed forecasts, and to more analysts following the firm. Using a large US sample for the period 1977-2007 and several proxies for conservatism we find robust evidence consistent with our expectations. Our results are in line with conservatism being useful not only for debt-holders, but also for equity-holders.

Number of Pages in PDF File: 41

Keywords: Accounting conservatism, asymmetric reporting, information asymmetry, information precision

JEL Classification: G10, G38, M41

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Date posted: September 1, 2011 ; Last revised: December 10, 2013

Suggested Citation

García Lara, Juan Manuel and Garcia Osma, Beatriz and Penalva, Fernando, Information Consequences of Accounting Conservatism (December 10, 2013). European Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1920356 or http://dx.doi.org/10.2139/ssrn.1920356

Contact Information

Juan Manuel García Lara (Contact Author)
Universidad Carlos III de Madrid - Department of Business Administration ( email )
Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
Beatriz Garcia Osma
Universidad Autonoma de Madrid ( email )
Departamento de Contabilidad
Avda. Fco. Tomas y Valiente 5
Madrid, Madrid 28049
Spain
Fernando Penalva
IESE Business School - University of Navarra ( email )
Avenida Pearson 21
Barcelona, 08034
Spain
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