Why Are Losses Less Persistent than Profits? Curtailments versus Conservatism

Management Science, Forthcoming

58 Pages Posted: 19 Mar 2014 Last revised: 24 Mar 2016

See all articles by Alastair Lawrence

Alastair Lawrence

London Business School / University of California, Berkeley

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Estelle Sun

Boston University - Questrom School of Business

Date Written: March 17, 2016

Abstract

It is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses. Yet the underlying explanation for these results is unclear. One explanation lies in the abandonment option, whereby firms with losses are more likely to curtail operations (e.g., Hayn 1995). Another explanation involves timely loss recognition stemming from conservative accounting (e.g., Basu 1997). We provide direct evidence that curtailments are an important factor contributing to the lower persistence of losses. An implication of our results is that popular measures of conservatism, such as the measure proposed by Basu (1997), also reflect curtailments.

Keywords: Conservatism, conditional conservatism, abandonment option, curtailment, asset impairment

JEL Classification: M41, C23, D21, G32

Suggested Citation

Lawrence, Alastair and Sloan, Richard G. and Sun, Estelle Yuan, Why Are Losses Less Persistent than Profits? Curtailments versus Conservatism (March 17, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2410590 or http://dx.doi.org/10.2139/ssrn.2410590

Alastair Lawrence (Contact Author)

London Business School / University of California, Berkeley ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Estelle Yuan Sun

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)

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