Financial reporting of good news and bad news: evidence from accounting narratives

We develop a theory of the relation between biases in financial reporting and managers' incentives to issue timely voluntary disclosures. We find that firms with relatively more conservative accounting are less likely to make timely voluntary disclosures than firms with less conservative accounting. Therefore, price is more timely in reflecting the news of firms with less conservative accounting. Prior research has assumed that the timeliness by which news is impounded in price is uncorrelated with the nature of accounting earnings and has ascribed a concave earnings-return relation to the accounting system reporting bad news on a more timely basis than good news. In our theory, a concave relation is not necessarily attributable to a difference in the way the accounting system reports good vs. bad news. Rather, our prediction stems from how biases in mandatory financial reports determine which firms optimally choose to make voluntary preemptive disclosures and which do not. Hence, our theory provides an alternative explanation for the empirical findings and cautions against interpreting them as evidence that accounting is conservative. Finally, we identify means of empirically distinguishing between the alternative explanations.

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Tone disclosure and financial performance: evidence from Egypt

Accounting Research Journal ◽

10.1108/arj-09-2016-0123 ◽

2018 ◽

Vol 31 (1) ◽

pp. 63-74 ◽

Cited By ~ 7

Author(s):

Doaa Aly ◽

Sherif El-Halaby ◽

Khaled Hussainey

Keyword(s):

Financial Performance ◽

Financial Reporting ◽

Firm Growth ◽

Positive Association ◽

Ordinary Least Squares ◽

Bad News ◽

Good News ◽

Annual Reports ◽

Least Squares Regression ◽

Content Type

Purpose This paper aims to examine the extent to which financial performance (FP) represents one of the main determinants for tone disclosure (TD) in Egyptian annual reports. The authors also measure the bidirectional relationship between TD and FP. Design/methodology/approach The manual content analysis is used to measure the levels of TD in annual reports for a sample of 105 firms listed on the Egyptian stock market. The sample covers a three-year period (2011-2013). Findings The descriptive analysis in this paper shows that Egyptian firms disclose more good news than bad news. Therefore, the net news disclosure, or net variances, between good/bad is positive. The empirical analysis shows a positive association between the narrative disclosure of good/bad news and FP based on return on assets. The authors also find a highly significant association between the auditor, profitability, leverage, firm growth and financial reporting of good/bad news information. Finally, the results of the ordinary least squares regression show that the causality between the two endogenous variables runs from FP to TD. Thus, TD is determined by FP. Originality/value This study offers a novel contribution to disclosure studies by being the first study to examine TD in one of the developing countries.

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Does financial crisis affect financial reporting of good news and bad news?

International Journal of Accounting Auditing and Performance Evaluation ◽

10.1504/ijaape.2014.066393 ◽

2014 ◽

Vol 10 (4) ◽

pp. 410 ◽

Cited By ~ 2

Author(s):

Mohammad Said Ressas ◽

Khaled Hussainey

Keyword(s):

Financial Crisis ◽

Financial Reporting ◽

Bad News ◽

Good News

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Identifying Conditional Conservatism in Financial Accounting Data: Theory and Evidence

The Accounting Review ◽

10.2308/accr-51640 ◽

2016 ◽

Vol 92 (4) ◽

pp. 191-216 ◽

Cited By ~ 22

Author(s):

Sunil Dutta ◽

Panos N. Patatoukas

Keyword(s):

Construct Validity ◽

Financial Reporting ◽

Data Availability ◽

Bad News ◽

Good News ◽

Alternative Measure ◽

Coefficient Estimates ◽

Accounting Data ◽

Conditional Conservatism ◽

Additional Support

ABSTRACT Using a financial reporting and valuation model, we investigate the construct validity of Basu's (1997) asymmetric timeliness (AT) regression coefficient as a measure of conditional conservatism in corporate financial reporting. We predict that the AT coefficient will be positive even in the absence of conditional conservatism, and it will vary with non-accounting factors even if the degree of conditional conservatism is held constant. Our empirical analysis shows that AT coefficient estimates vary in directions predicted by our theory. Specifically, we find that AT coefficient estimates increase with expected returns and asymmetry in the distribution of returns, and decrease with cash flow persistence. Importantly, we identify the spread between the variances of bad news and good news accruals as an alternative measure of conditional conservatism that is free of the effects confounding the AT coefficient. Consistent with a key implication of conditional conservatism, we find that the variance of bad news accruals is significantly higher than the variance of good news accruals primarily due to conditionally conservative accruals related to inventory write-downs, long-term asset write-downs, and goodwill impairments. A series of placebo tests provides additional support for the construct validity of our alternative measure of conditional conservatism. Data Availability: Data are publicly available from the sources indicated in the text.

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