The Lack of Timeliness with Which Stock Price Incorporates Bad News and the Earnings-return Asymmetry between Negative and Positive Returns: Evidence from Stock Liquidity

58 Pages Posted: 2 Dec 2018 Last revised: 10 Feb 2020

See all articles by June Cheng

June Cheng

Hong Kong Polytechnic University - Faculty of Business

Jing Fang

Hong Kong Polytechnic University

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: October 1, 2018

Abstract

The larger association between earnings and contemporaneous returns for negative returns than for positive returns is often attributed to conditional conservatism. We reason that this asymmetry may also be driven by the lack of timeliness with which stock price incorporates bad news relative to good news. We analytically show that when stock price incorporates bad news with delay, the asymmetry can exist in the absence of conditional conservatism. This suggests the testable hypothesis that the asymmetry increases (decreases) with factors that impede (facilitate) the incorporation of bad news into stock price. Using stock liquidity to test this hypothesis, we find that the earnings-return asymmetry decreases, and even disappears, as stock liquidity increases. Our findings support the view that variation in the earnings-return asymmetry may also reflect variation in the quality of the return generating process rather than variation in conditional conservatism.

Keywords: Conditional conservatism; Stock liquidity; Earnings-return asymmetry; Asymmetric timeliness

JEL Classification: G14, G40, M40, M41

Suggested Citation

Cheng, June and Fang, Jing and Myers, Linda A., The Lack of Timeliness with Which Stock Price Incorporates Bad News and the Earnings-return Asymmetry between Negative and Positive Returns: Evidence from Stock Liquidity (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3275226 or http://dx.doi.org/10.2139/ssrn.3275226

June Cheng

Hong Kong Polytechnic University - Faculty of Business ( email )

Hung Hom, Kowloon
Hong Kong

Jing Fang

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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