International Differences in the Timeliness, Conservatism and Classification of Earnings

Abstract

In this study we compare the timeliness and conservatism of reported earnings across the U.S. and U.K. GAAP regimes. We present a theoretical model of the differential speeds of recognition of good news and bad news. This suggests informative and relatively robust ways of measuring dimensions of conservatism in income recognition. The analysis shows the importance of distinguishing between delays in reporting good news and early recognition of bad news, when comparing conservatism across GAAP regimes. Empirical results suggest that the treatment of extraordinary items is important in assessing relative conservatism. The degree of conservatism of the U.S. GAAP regime appears significantly greater than for the U.K. GAAP regime, when estimated using ordinary earnings. However, when conservatism is estimated using earnings after extraordinary items we find that the gap is far less pronounced, and may even disappear. Our results further indicate that the main feature distinguishing the timeliness of earnings between the U.S. and U.K. is not the relative speed of recognition of bad news, but the much slower recognition of good news under U.S. GAAP.

JEL Classification: M41, M44, M47, M49, G15, N20