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Conservatism, Accrual Persistence Asymmetry, and Stock Returns

42 Pages Posted: 16 Jan 2012 Last revised: 12 Jun 2014

Gulraze Wakil

Lakehead University - Faculty of Business Administration

Pervaiz Alam

Kent State University

Date Written: May 26, 2014

Abstract

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.

Keywords: accruals anomaly, accounting conservatism, market inefficiency, persistence asymmetry

Suggested Citation

Wakil, Gulraze and Alam, Pervaiz, Conservatism, Accrual Persistence Asymmetry, and Stock Returns (May 26, 2014). CAAA Annual Conference 2012; 2014 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=1985743 or http://dx.doi.org/10.2139/ssrn.1985743

Gulraze Wakil (Contact Author)

Lakehead University - Faculty of Business Administration ( email )

955 Oliver Road
955 Oliver Road
Thunder Bay, Ontario P7B 5E1
Canada

Pervaiz Alam

Kent State University ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1121 (Phone)
330-672-2548 (Fax)

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