Timeliness Of Earnings Research Articles

Institutional ownership composition and accounting conservatism

This study empirically investigates the association between institutional ownership composition and accounting conservatism. Transient (dedicated) institutional investors, holding diversified (concentrated) portfolios with high (low) portfolio turnover, focus on portfolio firms’ short-term (long-term) perspectives and trade heavily (generally do not trade) on current earnings news. Thus, I predict that as transient (dedicated) institutional ownership increases, firms will exhibit a lower (higher) degree of accounting conservatism. Consistent with my predictions, in the context of asymmetric timeliness of earnings, I document that as the level of transient (dedicated) institutional ownership increases, earnings become less (more) asymmetrically timely in recognizing bad news.

The effects of harmonization and convergence with IFRS on the timeliness of earnings reported under Chinese GAAP

This study examines the effects of a series of harmonization and convergence with IFRS on the timeliness of recognition of earnings in emerging Chinese markets. We find that earnings reported under Chinese GAAP have a lower earnings response coefficient, but a higher future earnings response coefficient, than earnings reported under IFRS before Chinese GAAP converged with IFRS in 2007. This indicates that earnings reported under Chinese GAAP are generally less timely than earnings reported under IFRS before convergence. We also find that the future earnings response coefficient of earnings reported under Chinese GAAP continues to increase, indicating that the timeliness of recognition of earnings reported under Chinese GAAP worsened after a series of harmonization and convergence with IFRS in China. Taken together, this study provides evidence indicating that harmonizing and converging national accounting standards with IFRS in emerging capital markets may not necessarily increase accounting quality.

Mandatory Audit Firm Rotation and Audit Quality

In a setting where mandatory audit firm rotation has been effective for more than 20 years (i.e. Italy), we analyse changes in audit quality during the auditor engagement period. In our research setting, auditors are appointed for a three-year period and their term can be renewed twice up to a maximum of nine years. Since the auditor has incentives to be re-appointed at the end of the first and the second three-year periods, we expect audit quality to be lower in the first two three-year periods compared to the third (i.e. the last) term. Assuming that a better audit quality is associated with a higher level of accounting conservatism, and using abnormal working capital accruals as a proxy for the latter, we find that the auditor becomes more conservative in the last three-year period, i.e. the one preceding the mandatory rotation. These results are confirmed using Basu's [1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37] timely loss recognition model. In an additional analysis, we use earnings response coefficients as a proxy for investor perception of audit quality, and we observe results consistent with an increase in audit quality perception in the last engagement period.

Innovation efficiency and asymmetric timeliness of earnings: Evidence from an emerging market

This study investigates the impact of intellectual capital output on the asymmetric income timeliness of firms in Taiwan, which is an emerging economy with a high concentration of research and development (R&D)-intensive firms but poor investor protection. The higher growth opportunities and increased risk faced by R&D firms make them more vulnerable to shareholder litigation. Specifically, I examine whether companies that are less efficient at transforming new ideas or techniques into granted patents are more timely in their recognition of losses and less timely in their recognition of gains in response to higher expected litigation costs. Indeed, I observe a negative relationship between innovation efficiency and asymmetric income timeliness and this is more evident among highly R&D-intensive firms. In a parallel analysis, I also find that the observed greater earnings conservatism of low-innovation-efficient firms is more evident following the introduction of the Securities and Futures Investor Protection Act in the year 2003, when a class action litigation mechanism was established. Together, these findings highlight the role of accounting conservatism in mitigating the potential litigation risk faced by high-tech industries.

Corporate ownership, corporate governance reform and timeliness of earnings: Malaysian evidence

This paper provides the first evidence showing that ownership concentration and the identity of the largest shareholder matter to the timeliness of corporate earnings, measured by a stock price-based timeliness metric and the reporting lag. Using panel data of 1276 Malaysian firms from 1996 to 2009, we find a non-linear relationship between concentrated ownership, measured by the largest shareholding in a firm, and the reporting lag but not the timeliness of price discovery. Although firms with government as the largest shareholder and political connections have a significantly shorter reporting lag, only the former are timelier in price discovery. Firms with family and foreigners as the largest shareholder however are less timely in price discovery. While the reporting lag is shorter in the period after the integration of the Malaysian Code of Corporate Governance (MCCG) into Bursa listing rules, its impact on the timeliness of price discovery is mostly immaterial.

Lack Of Timeliness, Noise And Transitory Components In Earnings As Explanations For The Apparent Decline In The Value Relevance Of Earnings

Prior studies identify three factors that contribute to the low contemporaneous association between returns (prices) and earnings: lack of timeliness of earnings capturing value relevant information, noise in earnings, and transitory elements in earnings. This study seeks to identify whether these factors contribute to the observed inter-temporal decline in the contemporaneous association between returns (prices) and earnings documented in recent literature. Prior studies do not explicitly examine the affect of these factors on the inter-temporal decline, and the extant evidence is mixed. Empirical evidence presented here indicates that lack of timeliness of earnings and value-irrelevant noise in earnings have increased over time, both contributing to the documented inter-temporal decline in the contemporaneous association between returns (prices) and earnings.

Litigation Cost, Market-to-Book, and Asymmetric Timeliness of Earnings

Recent studies have questioned the validity of the Basu asymmetric timeliness of earnings (AT) as the proxy for accounting conservatism. An important basis for the criticism is the negative association observed between AT and market-to-book ratio (MB), another proxy for conservatism. Drawing upon prior research, we hypothesize and find that the negative relationship is stronger in a more litigious environment, indicating that low MB is a proxy for elevated expected litigation cost. Therefore the negative association reflects the rational response of managers and auditors in applying greater conservatism to mitigate expected litigation cost that increases as MB dips below a threshold. The negative association is not a valid basis for questioning the validity of the Basu model. This study demonstrates that MB is a proxy for risk, contributing to the debate on whether book-to-market ratio is a proxy for risk or the product of mispricing in the finance literature.

Foreign Private Issuers' Application of IFRS Around the Elimination of the 20-F Reconciliation Requirement

This study examines how the elimination of the 20-F reconciliation requirement affects the quality of accounting data prepared by cross-listed firms that report under IFRS as promulgated by the IASB (hereafter CL IFRS firms). Using IFRS-adopting firms that are not cross-listed in the U.S. (hereafter NCL IFRS firms) as the control sample, we find that CL IFRS firms experience a decrease in the magnitude of accounting discretion, a change in the asymmetric timeliness of earnings, and an improvement in the value relevance of reported earnings between the pre- and the post-elimination periods. These results suggest that the SEC's previous reconciliation requirement may have an unintended negative effect on CL IFRS firms' incentives in the application of IFRS. Comparing accounting quality under IFRS and U.S. GAAP in the post-elimination period, our additional analysis shows that the quality of accounting data prepared using IFRS by CL IFRS firms is comparable to that prepared using U.S. GAAP by U.S. firms, except that IFRS-based numbers exhibit less earnings asymmetry than U.S. GAAP-based numbers.

Aggressive Financial Reporting and Corporate Fraud

This study documents new evidence on the relationship between firms financial reporting behavior and engagement in corporate fraud. Using a matched sample of 184 companies over an eight-year period from 2003 to 2010, we empirically examine whether firms that practice aggressive financial reporting are more likely to be involved in corporate fraud. We determine aggressive financial reporting by (1) conducting a time-series test of timely loss recognition and (2) using asymmetric timeliness of earnings models. Our results show that firms with fraudulent financial statements employ aggressive financial reporting during the two years prior to the occurrence of fraud. Specifically, we found that firms engaged in fraud have significantly less timely loss recognition and lower asymmetric timeliness of earnings compared to firms not engaged in fraud. The result is robust even after including various controls. We conclude that aggressive reporting provides an early sign of the potential for corporate fraud, and thus contributes towards efforts to deter fraud.

On Estimating Conditional Conservatism

ABSTRACTThe concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage.Data Availability: Data are publicly available from sources identified in the article.

Audit opinion improvement and the timing of disclosure

Companies have been found to report positive information more quickly than they report negative information (i.e., good news early, bad news late). This paper investigates the potential impact of audit opinion change on the timeliness of financial disclosures, with improvements in audit opinion considered to be “good news.” We take both the direction and the magnitude of audit opinion change into consideration, with magnitude measuring how far the opinion is from an unqualified opinion (i.e., an unqualified opinion with explanatory paragraph is closer to an unqualified opinion than a qualified opinion is). We find that firms experiencing an improvement in their audit opinions disclose their financial results earlier, while those with audit opinion deteriorations report their financial results later, and that these effects were related to the magnitude of the opinion change. What's more, there is an asymmetric response to good audit opinion news vs. bad audit opinion news, with bad audit opinion news having a larger effect on earnings timeliness than the effect on earnings timeliness of good audit opinion news. Overall, our results support the “good news early, bad news late” notion. Finally, we also find that overall earnings timeliness has improved in China since the enactment of new reporting regulations in 2006.

Goodwill accounting and asymmetric timeliness of earnings

PurposeThe purpose of this paper is to investigate how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of earnings;, i.e. accounting conservatism.Design/methodology/approachVarious empirical models are applied to a sample of 11,034 firms. To capture a cross‐sectional variation in asymmetric timeliness of earnings, Kahn and Watts' C_Score is adopted.FindingsIt is found that financial reporting for firms with purchased goodwill has become more conservative after the enactment of the new standard. However, once an increase in conservatism that is not attributable to new goodwill accounting is controlled for, it is found that accounting earnings for firms with purchased goodwill become less conservative.Research limitations/implicationsThe results should be interpreted with caution, because the effect of concurrent events other than the adoption of SFAS 142 on reported earnings is not perfectly controlled.Practical implicationsThe results of this paper support Watts' assertion that new goodwill accounting impairs accounting earnings' ability to reflect the economic earnings in a timely manner, but these results should be interpreted with caution, as the main objective of goodwill accounting is not to improve accounting conservatism.Originality/valueThis paper makes a timely contribution to the debate of fair value accounting by focusing on the impact of SFAS 142 on the asymmetric timeliness of earnings. By employing all available firms with purchased goodwill balances rather than relying on firms that report impairment losses, our research design better captures the impact of SFAS 142 on financial reporting.

Goodwill Accounting and Asymmetric Timeliness of Earnings

This paper investigates how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of earnings; i.e., accounting conservatism. We adopt Kahn and Watts’ (2009) C_Score, a firm-year measure of Basu (1997) conservatism, to capture a cross-sectional variation in asymmetric timeliness of earnings. We find that financial reporting for firms with purchased goodwill has become more conservative after the enactment of the new standard. However, once we control for an increase in conservatism that is not attributable to new goodwill accounting, we find that accounting earnings for firms with purchased goodwill become less conservative. Our results support Watts’ (2003a) assertion that new goodwill accounting impairs accounting earnings’ ability to reflect the economic earnings in a timely manner, but these results should be interpreted with caution, as the main objective of goodwill accounting is not to improve accounting conservatism.

Earnings management and accounting conservatism: The case of Iran

This paper investigates the relationship between earnings management and accounting conservatism in Iranian firms. In this paper, conservatism is measured by Basu (1997) and Roychowdhury and Watts (2007) models, and earnings management is measured by modified Jones model (1996). The statistical population studied at this research includes firms accepted in Tehran Stock Exchange, and the period of research is the years since 2001 to 2008. The systematic omission method has been used in this research in order to achieve the sample and 480 firm-year observations were chosen as the sample for research. This paper empirically tests the relationship between earnings management and the asymmetric timeliness of earnings using ordinary least squares (OLS) regressions. Results show a negative relationship between earnings management and accounting conservatism. The results suggest that firms with lower levels of earnings management appear to have greater asymmetric timeliness coefficients than firms with higher levels of earnings management. The results are robust to various control variables that include the market-to-book ratio, leverage and firm size. Key words: Earnings management, accounting conservatism, Tehran stock exchange.

The Conservatism Principle and the Asymmetric Timeliness of Earnings: An Event‐Based Approach*

AbstractWe test the asymmetric timeliness hypothesis by using information in extreme events as a measure of good/bad news. Our focus on extreme events is motivated by two arguments. First, the accounting concept of materiality in conjunction with litigation risk influences managers and auditors to make more conservative choices with respect to material events. Second, focusing on extreme shocks minimizes the probability that accounting slack may obscure the effect of asymmetric timeliness (Beaver and Ryan 2005). We identify individual events using short‐window extreme returns, since long‐window returns would aggregate the effect of multiple events and thus limit our ability to detect the asymmetry. Taken together, these features of our research design provide a more powerful test of asymmetric timeliness. Consistent with prior studies, we document that the correlation between bad news and concurrent earnings is significantly higher than that between good news and concurrent earnings. Our analysis of extreme events also enables us to document higher correlation of good news with earnings two or more quarters ahead. This is in contrast to prior studies that were unable to document asymmetry in the relation between returns and subsequent earnings in the opposite direction to that between returns and concurrent earnings. Our paper contributes to the growing literature on conservatism by modifying the Basu methodology to enhance the power of the test of asymmetric timeliness.

Earnings Conservatism in an Emerging Capital Market: Evidence from Iran

In this paper we investigate whether earnings are conservative in financial reporting of firms listed in Tehran Stock Exchange (TSE)? Using the asymmetric timeliness of earnings, we measure earnings conservatism for 495 firm-years during 2001-2009, we hypothesize that earnings in all periods for sample firms are conservative. Consistent with Basu (1997), we classify the sample firms in two groups: firms with good news and firms with bad news. Our measure of conservatism is the difference between the slope coefficients for bad and good news firms. In some periods, our findings support the existence of conservatism in financial reporting of these firms; however in some periods our measure is negative which means that earnings are not conservative in these periods.

Change of Auditors in Businesses and Earnings Conservatism

This paper investigates the level of earnings conservatism during the first year of auditor change. We hypothesize that newly appointed auditors demand for more conservative accounting compared to other auditors due to lack of specific knowledge on the new client and higher litigation risks. We measure earnings conservatism based on the asymmetric recognition speed of good news and bad news on earnings, using Basu’s reverse regression. The sample includes 3054 firm-year observations from 2003-2008. Our results indicate that firms with newly appointed auditor experienced significantly higher earnings conservatism than other firms. We also find that the level of earnings conservatism required by newly appointed auditors depends on the size of the ex-auditor and the successor. Specifically we find that firms that change from small audit firm to Big 4 exhibit significantly higher earnings conservatism than firms that changed from Big 4 to small audit firms. This evidence is consistent with the argument that auditor require more conservative audit when risk of litigation is higher. Keywordsauditor changes, auditor switching, asymmetric timeliness of earnings, Big 4 auditors.

Conservatism Flow and the Pricing of Credit Risk

I study the relation between the pricing of credit default swaps (CDSs) and three recently proposed firm-year measures of conditional conservatism or conservatism flow: asymmetric timeliness of earnings, asymmetric behavior of accruals, and conservatism ratio. Using CDS pricing data from Fitch, I show that there is a negative association between CDS price with maturities from one to ten years, and the first two metrics of conservatism flow. I also document that the strength of the association decreases as maturity increases. My results are consistent with the hypothesis that managers practicing timely accounting recognition of economic losses tend to avoid ex ante negative NPV projects and more quickly abandon projects that turn out to be negative NPV ex post. These, in turn, lead to an association with CDS price, via a reduction of information asymmetry between firm insiders and outsiders, the provision of a reliable estimate of future firm wealth, and a reduction in probability of bankruptcy. I also show that the effect of asymmetric timeliness is incremental to the book-to-tax ratio, which is thought to be a measure of conservatism by the literature on taxation.

Asymmetry in earnings timeliness and persistence: a simultaneous equations approach

This study addresses simultaneity bias in piecewise linear forms of the earnings-return relation. We specify an overidentified system of simultaneous equations that incorporates both asymmetric earnings timeliness and asymmetric earnings persistence specifications, and implement two-stage least squares for this piecewise linear system. Estimation of such a system that is piecewise linear in endogenous variables presents several distinctive issues for which there exists no precedent in the accounting literature. Findings provide evidence that the asymmetric timeliness specification is particularly affected by simultaneity, and that failing to correct for simultaneity results in coefficient estimates that understate the degree of asymmetric earnings timeliness. Moreover, our findings suggest that asymmetric earnings timeliness has dissipated, not increased, over time when simultaneity is taken into account.

Accounting Conservatism in Japan: Time Series Analysis of the Asymmetric Timeliness of Earnings

We examine time-series variations in accounting conservatism in the Japanese market. Previous studies have found that the Japanese market has low accounting conservatism. Over the last 30 years, however, the Japanese market has experienced significant institutional changes. Thus, we examine whether accounting conservatism in the Japanese market varied over the period 1979-2007. To quantify accounting conservatism, we use the model developed by Basu (1997), known as “asymmetric timeliness”. Because the market-to-book (MTB) ratio is an alternative measure of accounting conservatism, and Roychowdhury and Watts (2007) find a cause-and-effect relationship between asymmetric timeliness and MTB, we also investigate whether institutional changes affect this relationship.To assess institutional changes in the Japanese market, we highlight the code law origin and corporate governance, litigation risk, GAAP rules, the boom and bust economic cycle, and ownership structure. These factors are interrelated and mutually influence the asymmetric timeliness of earnings. We divide our sample period into four (1979-1984, 1985-1990, 1991-1999, 2000-2007), based on variations in these factors. We find that Japanese firms exhibit asymmetric timeliness, regardless of the investigation period, and the fourth period exhibits the highest asymmetric timeliness. Our analysis reveals that GAAP rule amendments around 2000 had considerable effects on this variation in asymmetric timeliness, although it seems unlikely that it was the only factor. Further analysis demonstrates that the boom and bust economic cycle weakened the cause-and-effect relationship between asymmetric timeliness and MTB.