The relationship between loss, macroeconomic condition and conservatism

Asna Abdullah Atqa,Azlina Ahmad,Radziah Abdul Latiff,Norman Mohd Saleh

doi:10.5267/j.msl.2019.5.004

Abstract

This study is motivated by the high frequency of loss occurrence since late 1990s among Malaysian public listed firms, and the conflicting findings of the impact of the macroeconomic conditions and firm-specific attributes on different measures of earnings quality. In addition, this study examines the impact of firms’ specific attributes on earnings quality using a better established theory, known as the life-cycle hypothesis. The objectives of this study are; (1) to examine the relationship between firms’ loss condition on conservatism as an earnings quality measure as well as the moderation of macroeconomic condition on the relationship and (2) to examine the relationship between life-cycle stages and conditional conservatism. Samples for the study are companies listed on Bursa Malaysia from 1995 to 2010. Using the C_Score measure of conservatism as the dependent variable, firms with loss condition, have been found to be significantly more conservative than profit firms. In addition, macroeconomic condition, strengthen the relationship between loss and conservatism when the results indicate that loss firms undergoing economic crisis are significantly more conservative than loss firms under normal economic condition. Incorporating the firms’ life-cycle stages, the study found that growth firms signal fewer losses than mature firms, thus accepting the set hypothesis. Implication of this study is that ignorance of these issues could lead to significantly misleading interpretation of earnings quality.

Highlights

The focus and main contribution of this study are to examine the relationship of the three variables of interests against conservatism as an earnings quality measure and identify the existence of biasness, if any, within the analysis of the three variables
The result of robust fixed effects improves significantly from the normal fixed effect model as loss condition (LOSD) is found to be positively affecting the bad news conservatism level (C_Score) at 10% significance level. This means that the higher the loss condition, the greater the signal for conservatism would be, accepting the hypothesis 1 (H1) that loss firms are more conservative than profit firms
This study shows that loss firms signal significantly more bad news conservative information than profit firms as shown by hypothesis 1

Summary

Introduction

The focus and main contribution of this study are to examine the relationship of the three variables of interests against conservatism as an earnings quality measure and identify the existence of biasness, if any, within the analysis of the three variables. Earnings quality is driven by accounting measurement rules and economic attributes and these would result in different valuations and quality they have similar financial and operating conditions (Anthony & Ramesh, 1992; Black, 1998; Charitou et al, 2011). Despite the importance of loss condition, macroeconomic condition and life-cycle stages in their own fields and the established theoretical impacts of these factors on earnings quality (especially the value relevance construct) (Burgstahler, Jiambalvo & Noreen, 1989; Charitou et al, 2011; Francis et al, 2008b; Klein & Marquardt, 2006; Meek & Meek, 2009 (on negative earnings and losses); Balakrishnan, 2010; Bertomeu & Magee, 2011; Chen et al, 1986; Sutthachai & Cooke, 2009 (on business cycles and economic crises); Anthony & Ramesh, 1992; Park & Chen, 2006 (on firms’ life-cycle theory)), very few studies have examined them in the context of conservatism

Objectives

Results

Conclusion