Asymmetric Timeliness of Earnings, Market-to-Book and Conservatism in Financial Reporting

Roychowdhury, Sugata; Watts, Ross L.

doi:10.2139/ssrn.638001

Cited by 233 publications

(363 citation statements)

References 21 publications

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“…Ideally, to the extent that σ 2 (ε j ) = σ 2 (ε k ) and ρ jk =1 in 15 Dargenidou, McLeay and Raonic (2007) provide empirical evidence of the differences in the speed of news recognition in earnings expectations in the European Union. Roychowndhury and Watts (2007) also apply a model employing future reported earnings as the dependent variable in showing that the recognition of news increases as the horizon in the dependent variable becomes longer. Note that forward earnings estimates ẽ t+1 are also examined here as an alternative input in users' decisions; recent research shows that this estimate is widely used in multiple-based valuation (Liu, Thomas and Nissim, 2007).…”

Section: Methodsmentioning

confidence: 99%

The Impact of Introducing Estimates of the Future on International Comparability in Earnings Expectations

Dargenidou

McLeay

2010

European Accounting Review

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The objective of this paper is to assess whether the inclusion of improved estimates of the future in corporate annual financial statements has brought about greater international comparability. It is argued that including more relevant information in financial reporting enables users to estimate earnings that are more able to reflect current economic conditions and up-to-date expectations of the future and thus recognize news in a more timely manner. To reflect the underlying economics of integrating financial markets, earnings expectations must be not only more timely but also more comparable. Thus, in examining the increasingly widespread adoption of International Financial Reporting Standards, this study considers both the timeliness and the comparability of earnings expectations in the European Union, before and after the mandatory IFRS implementation. The empirical findings support the view that users' earnings estimates have indeed become more timely in recognizing market news and significantly more comparable.

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Section: Methodsmentioning

confidence: 99%

The Impact of Introducing Estimates of the Future on International Comparability in Earnings Expectations

Dargenidou

McLeay

2010

European Accounting Review

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“…Firm value is likely to exceed the sum of the values of its separable net assets by the amount of goodwill, which represents both firm-specific assets-in-place and growth options/rents (Roychowdhury and Watts, 2007). Because this goodwill has little or no liquidation value, and because its market value on a going concern basis is largely unverifiable, debt holders generally ignore it in making lending decisions (for example, see Watts, 1977;Leftwich, 1983;Watts, 2006).…”

Section: Debt Holders' Demand For Verifiability and Auditingmentioning

confidence: 99%

Implications for GAAP from an analysis of positive research in accounting

Kothari¹,

Ramanna

Skinner

2010

Journal of Accounting and Economics

582

356

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Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP's principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

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“…From the perspective of empirical research, conservatism is characterized by asymmetric timeliness in terms of its recognition of profits and losses (Basu, 1997). That is, the response to bad news is faster than that to good news, so that assets tend to be underestimated (Roychowdhury and Watts, 2007). These two views are based on the high degree of checking and verification required for recognized assets.…”

Section: Introductionmentioning

confidence: 99%

Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

Kao¹,

Sie²

2016

International Journal of Financial Research

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To consider a firm's characteristics endogeneity and thereby determine its trend toward accounting conservatism, which in turn affects its financial distress, this study adopts the two-stage least squares approach. The first stage involves investigating the effect of the corporate characteristics on accounting conservatism. The empirical results indicate that financial distress and accounting conservatism exhibit a positive correlation. With respect to the non-financially distressed company, the accounting conservatism of the financially-distressed company is higher. The second phase in the logistic regression is to explore the relationship between the accounting conservatism trends and financial distress. The empirical results indicate that the trends and volatility of the accounting conservatism are significant and positively related to the financial distress, which may be due to the recognition of the company's annual loss on one occasion or the accountants' role in the function of exercising external oversight, thus increasing the company's accounting conservatism. According to the empirical results of this study we have found that the accounting conservatism trends of different company characteristics helps to determine the signs of financial distress. It is recommended that within the management of the company's operations the users of financial statements be aware of the trend and volatility of the accounting conservatism. This is of particular importance due to the probable development of the relevant decision-making processes of the company's stakeholders.

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Asymmetric Timeliness of Earnings, Market-to-Book and Conservatism in Financial Reporting

Cited by 233 publications

References 21 publications

The Impact of Introducing Estimates of the Future on International Comparability in Earnings Expectations

The Impact of Introducing Estimates of the Future on International Comparability in Earnings Expectations

Implications for GAAP from an analysis of positive research in accounting

Accounting Conservatism Trends and Financial Distress: Considering the Endogeneity of the C-Score

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