Conditional Earnings Conservatism and Corporate Refocusing Activities

Journal of Accounting Research, forthcoming

52 Pages Posted: 5 Apr 2006 Last revised: 17 Feb 2011

See all articles by Chun Yu Mak

Chun Yu Mak

University of Birmingham

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: February 12, 2011

Abstract

We extend standard models of conditional earnings conservatism and adaptation value to the context of the corporate refocusing activities of UK listed companies. This analysis is interesting because refocusing activities are: (i) commonly anticipated by significant negative returns in the financial year(s) before the refocusing event; (ii) typically associated with large material charges; and (iii) likely to be part of a strategic plan with the internal decision preceding the formal public announcement. We complement Burgstahler and Dichev (1997) by showing how their nonlinear relation between share prices and earnings changes around refocusing events as adaptation options are exercised. Because refocusing events also involve large realized losses and major changes to firms’ strategic plans, we expect to see systematic changes in the timing relations between stock returns and reported earnings. To capture this we show how the coefficients of Basu’s (1997) model of conditional conservatism change around refocusing events.

Keywords: Conservatism, refocusing, restructuring

JEL Classification: M41, M44, M47

Suggested Citation

Mak, Chun Yu and Strong, Norman Charles and Walker, Martin, Conditional Earnings Conservatism and Corporate Refocusing Activities (February 12, 2011). Journal of Accounting Research, forthcoming. Available at SSRN: https://ssrn.com/abstract=894432

Chun Yu Mak

University of Birmingham ( email )

Birmingham B15 2TT, Birmingham B15 2TT
United Kingdom

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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