Information Consequences of Accounting Conservatism
Juan M. García Lara
Universidad Carlos III de Madrid - Department of Business Administration
Beatriz Garcia Osma
Universidad Autonoma de Madrid
IESE Business School - University of Navarra
December 10, 2013
European Accounting Review, Forthcoming
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
Date posted: September 1, 2011 ; Last revised: December 10, 2013
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