Earnings restatements and differential timeliness of accounting conservatism

Ettredge, Michael; Huang, Ying; Zhang, Weining

doi:10.1016/j.jacceco.2012.01.002

Cited by 128 publications

(35 citation statements)

References 36 publications

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“…This is a wellknown and widely used proxy. The empirical evidence in Ettredge, Huang, and Zhang (2012) and Jayaraman (2012), among others, shows that the Khan and Watts proxy captures well variation in conservatism at the firm level. In our robustness tests, we also use the firm-year specific ratio of conservatism (CR) developed by .…”

Section: Firm-specific Measure Of Conservatismmentioning

confidence: 93%

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Information Consequences of Accounting Conservatism

Lara

Osma

Peñalva

2014

European Accounting Review

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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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Section: Firm-specific Measure Of Conservatismmentioning

confidence: 93%

“…As demonstrated in Ettredge et al (2012), variation in Conservatism(KW) captures variations in accounting conservatism.…”

Section: Firm-specific Measure Of Conservatismmentioning

confidence: 99%

Information Consequences of Accounting Conservatism

Lara

Osma

Peñalva

2014

European Accounting Review

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“…However, research also suggests that companies report more conservatively following a restatement than they do prior to the misstated period (Ettredge et al 2012). Similarly, Wilson (2008) finds that investors tend to discount the credibility of reported earnings in the quarters immediately following a restatement, but this effect dissipates rather quickly.…”

Section: Literature and Hypotheses Developmentmentioning

confidence: 99%

“…This increased client risk may be due to concern about damage to the auditor's reputation arising from continued association with a problematic client, or increases in expected audit risk and litigation risk arising from future audits. 1 However, other studies find that companies report more conservatively after a restatement and regain investor confidence within a few quarters of a restatement announcement (Ettredge et al 2012;Wilson 2008). This suggests that following a restatement, companies may be at lower risk of future misstatements.…”

Section: Introductionmentioning

confidence: 99%

Evidence on the Association between Financial Restatements and Auditor Resignations

Huang¹,

Scholz²

2012

Accounting Horizons

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SYNOPSIS: Financial restatements have significant implications for auditor-client relationships. We estimate that a restatement increases the odds of an auditor resignation dramatically. Restatements involving fraud, reversing profit to loss, and those disclosed in press releases appear to drive the increased resignation likelihood. Furthermore, companies with relatively severe restatements are more likely to hire smaller auditors following a resignation. Collectively, these results are consistent with auditors interpreting restatements as an indication of increased client risk.

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“…In the same vein, a set of studies showed that conservatism benefits to debt contracting (Zhang, 2008;Nikolaev, 2009). Besides this contracting effect, other works support that accounting conservatism enhances firm value by mitigating information asymmetry and constraining earnings managements (LaFond and Roychowdhury, 2008;LaFond and Watts, 2008;Francis and Martin, 2010;García Lara et al, 2011;Ettredge et al, 2012;Kim and Zhang, 2013). Other studies explore the implications of capital market with regard to conservative accounting, especially the impact of conservatism on the cost of equity capital.…”

Section: Introductionmentioning

confidence: 97%

The effect of conservatism on cost of capital: MENA evidence

Khalifa

Othman

2014

Applied Economics

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The purpose of this article is to investigate the economic consequences of accounting conservatism in the Middle Eastern and North African (MENA) region. In particular, motivated by the lack of such studies in the context of emerging countries, we empirically examine the effect of conditional conservatism on firms' cost of equity capital. Using a sample of firms pertaining to 13 MENA countries during the period 2004-2007, we conduct three sets of tests. First, we assess the existence of conservatism in our sample following the model of Basu (1997). Second, we examine the association between conservatism and cost of equity capital. Third, we test the effect of two disaggregated measures of conservatismconservatism with respect to bad news (BNEWS) and conservatism with respect to good news (GNEWS) on the cost of equity.Results suggest that, overall firms in MENA region adopt conservative reporting. Furthermore, as predicted we find a negative association between conditional conservatism and the cost of equity capital. This evidence is robust to time series changes of variables and cross-country differences. The results also report a negative association between the two disaggregated measures of conservatism and the cost of equity capital. Our article gives additional light on the benefits of accounting conservatism.

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Earnings restatements and differential timeliness of accounting conservatism

Cited by 128 publications

References 36 publications

Information Consequences of Accounting Conservatism

Information Consequences of Accounting Conservatism

Evidence on the Association between Financial Restatements and Auditor Resignations

The effect of conservatism on cost of capital: MENA evidence

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