Study on The Asymmetric Timeliness of Informationnder The Multi-Period and The Conservatism Principle
Date Issued
2009
Date
2009
Author(s)
Lin, Tsung-Han
Abstract
Basu(1997) used the asymmetric timeliness of earnings to test whether conservatism exists in earnings. Based on the assumption of price leads earnings, he thought the asymmetry in recognition led to differences between bad news and good news periods in the timeliness and persistence of earnings. He used concurrent unexpected stock returns to be the proxy variables of good news and bad news. When the unexpected return is positive, it is good news; when the unexpected return is negative, it is bad news. The result indicated that earnings is more persistent to publicly available good news, and is more timely to bad news. Based on Basu’s research, we add the concept of multi-period to test whether earnings will be influenced by accumulated stock returns. According to the assumption of price leads earnings and conservatism, our main objective is to test when we extend the concept of multi-period, whether the earnings is still more persistent to good news and more timely to bad news. The sample includes all TSE-listed and OTC-listed companies from 1994 to 2007. We establish non variable-adding model and variable-adding model to regress annual earnings on different periods of accumulated stock returns. The result indicates that price indeed leads earnings, and under the multi-period and the conservatism, earnings is more persistent to good news and more timely to bad news. But the reactive time of bad news is not short enough as we expect. We think the possible reason is that companies in Taiwan are not conservative enough. One explanation is few years ago, the accounting standard board in Taiwan neglected conservatism, and that made companies choose favorable manners to report in financial statements. The other explanation is that in recent years, accounting standards are asked to show the true value of businesses, so the accounting standard board establishes fair value accounting to make financial reports full of more relevance. It makes companies more discretionary to choose favorable manners to report earnings. Therefore, bad news doesn’t react completely as we expect.
Subjects
conservatism
asymmetric timeliness of information
price leads earnings
good news
bad news
persistence
timeliness
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