Information Consequences of Accounting Conservatism
European Accounting Review, Forthcoming
41 Pages Posted: 1 Sep 2011 Last revised: 10 Dec 2013
Date Written: December 10, 2013
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.
Keywords: Accounting conservatism, asymmetric reporting, information asymmetry, information precision
JEL Classification: G10, G38, M41
Suggested Citation: Suggested Citation