Investor Sentiment and Accounting Conservatism

40 Pages Posted: 9 Oct 2017 Last revised: 3 May 2018

See all articles by Rui Ge

Rui Ge

Shenzhen University - Shenzhen Audencia Business School

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance

Feida Zhang

University of Queensland

Date Written: April 19, 2018

Abstract

This paper investigates the association between investor sentiment and accounting conservatism. We find that managers recognize economic losses in earnings in a more timely manner during periods of high investor sentiment. Further, the sentiment-conservatism relation is stronger for firms with greater sentiment-price sensitivity. We also find that the sentiment-conservatism association is stronger for firms with higher litigation risk and financial expert CEOs, and is weaker for firms with retiring CEOs. Overall, our results suggest that firms report earnings more conservatively in response to higher investor sentiment in order to mitigate potential litigation costs. These findings have implications for regulators and standard setters who have deemphasized accounting conservatism in recent years.

Keywords: Investor Sentiment, Accounting Conservatism, Litigation

JEL Classification: M40, M41

Suggested Citation

Ge, Rui and Seybert, Nicholas and Zhang, Feida, Investor Sentiment and Accounting Conservatism (April 19, 2018). Available at SSRN: https://ssrn.com/abstract=3049490 or http://dx.doi.org/10.2139/ssrn.3049490

Rui Ge (Contact Author)

Shenzhen University - Shenzhen Audencia Business School ( email )

Shenzhen
China

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Feida Zhang

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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