Conservatism, Accrual Persistence Asymmetry, and Stock Returns
Carleton University-Sprott School of Business
Kent State University
May 26, 2014
CAAA Annual Conference 2012
2014 Canadian Academic Accounting Association (CAAA) Annual Conference
This paper investigates accounting conservatism’s effects on accrual persistence and accrual-related future stock returns. We find conservatism significantly increases accrual persistence and accrual-related future stock returns and more so in high accrual firms. We attribute this to conservatism’s reliability and verifiability requirements. However, the effect is statistically insignificant using only low accrual firms. Therefore, conservatism’s effects on accruals depend on their magnitude, i.e., asymmetrically. Moreover, increases in persistence and stock returns related to conservatism in high accrual firms also exists in recent years during which prior literature has shown the accruals anomaly to have diminished to insignificant levels. Our paper will be of interest to investors because markets do not fully capture how accounting conservatism affects accruals and also to auditors, lenders, and standard setters since collectively our paper finds accounting conservatism to be a positive trait for financial reporting.
Number of Pages in PDF File: 42
Keywords: accruals anomaly, accounting conservatism, market inefficiency, persistence asymmetry
Date posted: January 16, 2012 ; Last revised: June 12, 2014
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