Accounting for News in the Banking Industry: mpact of Earnings Management
Date Issued
2008
Date
2008
Author(s)
Lin, Tin-Hsi
Abstract
Basu (1997) defines conservatism as the accountant’s tendency to require a higher degree of verification for recognizing good news than bad news in financial statements. Under his interpretation of conservatism, earnings will reflect bad news more quickly than good news. Basu calls the differential timeliness of earnings response to bad news versus good news the asymmetric timeliness of earnings and uses it as a measure of conservatism. In this paper, I choose changes in net loan charge-offs and changes in nonperforming assets as two news indicators in addition to stock returns for testing asymmetric timeliness of earnings in the banking industry. By observing the timeliness of earnings response to changes in net loan charge-offs or nonperforming assets, I obtain evidence of management manipulation in the banking industry. Although the normal relation between contemporaneous earnings and returns can still be maintained, I don’t think accounting conservatism can better be captured unless the effect of management manipulation is filtered out and the purpose of accounting is well defined.
Subjects
Conservatism
Earnings Management
Banking Industry
Timeliness
Asymmetry
Stock Returns
Net Loan Charge-offs
Nonperforming Assets
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