The Conservatism Principle and the Asymmetric Timeliness of Earnings: An Event-Based Approach
University of Minnesota Working Paper
49 Pages Posted: 8 Jul 2004
Date Written: March 2004
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
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