The Effects of Conservative Reporting on Investor Disagreement

51 Pages Posted: 11 Sep 2012 Last revised: 16 Sep 2016

See all articles by Carlo D'Augusta

Carlo D'Augusta

Middle Tennessee State University - Jennings A. Jones College of Business

Sasson Bar-Yosef

Bocconi University - Department of Accounting

Annalisa Prencipe

Bocconi University - Department of Accounting

Date Written: April 14, 2015

Abstract

We examine whether the level of a firm’s conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter.

Keywords: Accounting conservatism, investor disagreement

JEL Classification: G10, M40

Suggested Citation

D'Augusta, Carlo and Bar-Yosef, Sasson and Prencipe, Annalisa, The Effects of Conservative Reporting on Investor Disagreement (April 14, 2015). European Accounting Review, 2016, Volume 25 - Issue 3, Page 451-485, Available at SSRN: https://ssrn.com/abstract=2144294 or http://dx.doi.org/10.2139/ssrn.2144294

Carlo D'Augusta (Contact Author)

Middle Tennessee State University - Jennings A. Jones College of Business ( email )

1301 E Main St
Office BAS N403
Murfreesboro, TN Tennessee 37132
United States

Sasson Bar-Yosef

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Annalisa Prencipe

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

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