Information Consequences of Accounting Conservatism

European Accounting Review, Forthcoming

41 Pages Posted: 1 Sep 2011 Last revised: 10 Dec 2013

See all articles by Juan M. García Lara

Juan M. García Lara

Universidad Carlos III de Madrid - Department of Business Administration

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration; European Corporate Governance Institute (ECGI)

Fernando Penalva

IESE Business School - University of Navarra; European Corporate Governance Institute (ECGI)

Date Written: December 10, 2013

Abstract

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

García Lara, Juan Manuel and Garcia Osma, Beatriz and Penalva, Fernando, Information Consequences of Accounting Conservatism (December 10, 2013). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1920356 or http://dx.doi.org/10.2139/ssrn.1920356

Juan Manuel García Lara (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fernando Penalva

IESE Business School - University of Navarra ( email )

Ave. Pearson 21
Barcelona, Barcelona 08034
Spain
932534200 (Phone)
932534343 (Fax)

HOME PAGE: http://www.iese.edu

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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