The Conservatism Principle and the Asymmetric Timeliness of Earnings: An Event-Based Approach

University of Minnesota Working Paper

49 Pages Posted: 8 Jul 2004

See all articles by Pervin K. Shroff

Pervin K. Shroff

University of Minnesota - Twin Cities - Carlson School of Management

Ramgopal Venkataraman

University of Texas at Arlington

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: March 2004

Abstract

In this paper, we test the conservatism and asymmetric timeliness hypothesis by using information in extreme events as a measure of good/bad news. The methodology we develop provides a more powerful test of asymmetric timeliness by focusing on major events that occur in short event windows and whose accounting is likely to receive special attention from managers. Our approach has several other advantages over that used by prior studies: (i) we provide complete evidence on conservatism by testing both implications of asymmetric timeliness: higher correlation of bad news with concurrent earnings as tested by prior studies and delayed earnings recognition of good news; (ii) our event-based research design is not subject to inferential concerns that may apply to some prior research; and (iii) our analysis based on components of earnings provides a stronger test of asymmetric timeliness by eliminating the effect of differential persistence of good news versus bad news. Our evidence is consistent with the conservatism and asymmetric timeliness hypothesis.

Keywords: capital markets, returns-earnings relation, conservatism, asymmetric timeliness, persistence

JEL Classification: G12, M41, M44, D21, G14, G38

Suggested Citation

Shroff, Pervin K. and Venkataraman, Ramgopal and Zhang, Suning, The Conservatism Principle and the Asymmetric Timeliness of Earnings: An Event-Based Approach (March 2004). University of Minnesota Working Paper. Available at SSRN: https://ssrn.com/abstract=437144 or http://dx.doi.org/10.2139/ssrn.437144

Pervin K. Shroff (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-626-1570 (Fax)

Ramgopal Venkataraman

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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