Articlebronze2014

Information Consequences of Accounting Conservatism

Juan Manuel García Lara · Beatriz García Osma · Fernando Peñalva

134 citations0/0 files storedEuropean Accounting Review

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Accounting Theory and Financial Reporting

Abstract

We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to subsequent decreases in information asymmetries between firm insiders and outsiders. We predict and test if this decrease in information asymmetries manifests itself through: (a) a decrease in the bid–ask spread and in stock-returns volatility, and (b) an improved information environment for financial analysts, leading to more precise and less dispersed forecasts, and to more analysts following the firm. Using a large US sample for the period 1977–2007 and several proxies for conservatism we find robust evidence consistent with our expectations. Our results are in line with conservatism being useful not only for debt-holders, but also for equity-holders.

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References

2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1997The conservatism principle and the asymmetric timeliness of earnings1 1991Disclosure, Liquidity, and the Cost of Capital 2003Conservatism in Accounting Part I: Explanations and Implications 1996Corporate Disclosure Policy and Analyst Behavior.1993Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures 2000Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

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