Skewness of Earnings and the Believability Hypothesis: How Does the Financial Market Discount Accounting Earnings Disclosures?

33 Pages Posted: 18 Nov 1996

See all articles by Murugappa (Murgie) Krishnan

Murugappa (Murgie) Krishnan

Yeshiva University

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: December 1996

Abstract

When firms attempt to manage their earnings disclosures by presenting evidence selectively, sophisticated inference on the part of financial market participants entails a positive association between the market to book ratio of a firm and the skewness of the distribution of its announced earnings. In this paper, we put this hypothesis to the test, and confirm its main predictions. Our regressions reveal a prominent and robust role for skewness in the empirical relationships surrounding earnings disclosures, and suggest that in setting security prices the financial market's skepticism about how much private information managers have dominates the effect of perceived bankruptcy risk.

JEL Classification: G14, G10, M40

Suggested Citation

Krishnan, Murugappa (Murgie) and Sankaraguruswamy, Srinivasan and Shin, Hyun Song, Skewness of Earnings and the Believability Hypothesis: How Does the Financial Market Discount Accounting Earnings Disclosures? (December 1996). Available at SSRN: https://ssrn.com/abstract=15038 or http://dx.doi.org/10.2139/ssrn.15038

Murugappa (Murgie) Krishnan (Contact Author)

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6874 4473 (Phone)
+65 6779 2083 (Fax)

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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