Asymmetric Timeliness of Earnings and Complex Investments
Date Issued
2009
Date
2009
Author(s)
Lo, Chih-Wei
Abstract
This thesis would like to address whether firms with more complex investments exhibit higher conservatism than firms without. Applying Basu‘s definition, most studies regard ''earnings reflecting bad news more quickly than good news'' as an indicator of conservatism. A lot of researches have found that conservatism manifested by the differential speed in the recognition of economic gains and losses could counteract managers‘ incentives to overstate firm performance and mitigate the agency problem between management and shareholders. This study predicts that complex investments are highly associated with agency costs and investors/creditors would require higher conservatism to reduce the costs. In this research, complex investments are explored across three dimensions: (1) Investments in firms with cross-holding or pyramid structure (2) Investment in China (3) Diversification level of investment, and this paper explores the association between the investment complexity and the quality of earnings – timely recognition of economic losses. Findings are that firms with higher investment complexity are associated with more conservative earnings. The results hold after controlling for firm growth, financial risk and corporate governance structure.
Subjects
accounting conservatism
asymmetric timeliness
complex investments
investment in China
diversification
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