Information Consequences of Accounting Conservatism Articles uri icon

publication date

  • April 2014

start page

  • 173

end page

  • 198

issue

  • 2

volume

  • 23

International Standard Serial Number (ISSN)

  • 0963-8180

Electronic International Standard Serial Number (EISSN)

  • 1468-4497

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. © 2014 © 2014 European Accounting Association.

keywords

  • timely loss recognition; earnings management; economic consequences; investment decisions; bad-news; debt; disclosure; timeliness; profitability; relevance