The Asymmetric Effect of Accounting Conservatism on the Multi-Period Earnings
Date Issued
2009
Date
2009
Author(s)
Wang, Chun-Jen
Abstract
This study is to investigate the the asymmetric effect of accounting conservatism on the multi-period earnings. Fisrt, we examine the extent that the recognition of economic events in accounting earning lags that of the market in Taiwan. In other words, we assess the association between current annual stock returns and both current and future periods’ accounting earnings. Further, similar to Basu’s model (1997), we use postive and negative annual returns to proxy for “good news” and “bad news”, respectively, to test the asymmetric effect of accounting conservatism on the multi-period earnings. The samples used for the study consist of all Taiwan listed and OTC firms-year observations from the period 1993 to 2007. We ues the multiple regression analysis to test the association between current annual stock returns and both current and the next 7 periods’ annual accounting earnings. The empirical results are as follows:. The correlations between current annual stock returns and both current and 1 year lagged earnings are positive. The correlations between current annual stock returns and 2 years lagged earnings are not clear.The correlations between current annual stock returns and both 3 as well as 4 years lagged earnings are negative.. The association between current annual stock returns and current as well as the next 2 years’ earnings are relatively stronger. After the next 3 years, the association between current annual stock returns and future earnings are less significant. Further, there is no association between current annual stock returns and the next 5 to 7 years’ earnings.. The study shows that bad news tends to reflect mostly in the current period’s earnings and that good news tends to reflect in the current and future multi-periods’ earnings. In general, good news earnings is more persistet than bad news earnings. However, this study reveals that bad news also reflects in 2 to 4 years lagged earnings. These results suggest that the degree of conservatism in accounting in Taiwan is not much significant.. In the same intervals, the study shows that the coefficient on earnings is larger for positive than negative return. These results suggest that bad news earnings is more timely than good news earnings. However, the study also shows that not all losses for bad news are recognized immediately in the current period as predictions. In contrast, bad news reflects in 2 to 4 years lagged earnings.
Subjects
Accounting conservatism
Conservative accounting
Return-earnings relation
Earnings asymmetry
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