scholarly journals The Implications Of Accounting Conservatism For The Relation Between Earnings And Stock Returns

2011 ◽  
Vol 6 (12) ◽  
Author(s):  
Jinhan Pae
Keyword(s):  
Stock Returns ◽  
Econometric Analysis ◽  
Accounting Conservatism ◽  
Bad News ◽  
Good News ◽  
Font Size ◽  
Robust Test ◽  
Slope Coefficient ◽  
Noise Ratio

<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Characterizing accounting conservatism as the accountants&rsquo; tendency to require a higher degree of verification for recognizing good news than bad news, Basu (1997) predicts that the slope coefficient and R<sup>2</sup> in a regression of earnings on concurrent stock returns will be higher for bad news (negative stock returns) than for good news (positive stock returns). However, standard econometric analysis indicates that the R<sup>2</sup> is a function of the sensitivity of earnings to returns and the noise ratio, which is defined as the ratio of the variance of noise in earnings to the variance of noise in returns. I show that the R<sup>2</sup> from the regression of earnings on stock returns is not necessarily higher for bad news than for good news. So the test of R<sup>2</sup> is not a robust test of accounting conservatism. Consistent with the prediction, I find that the slope coefficient is higher for bad news firms reporting losses than for good news firms reporting profits, but R<sup>2</sup> is lower for bad news firms reporting losses than for good news firms reporting profits. </span></span></p>

scholarly journals Asymmetry and Leverage with News Impact Curve Perspective in Australian Stock Returns’ Volatility during COVID-19

2021 ◽  
Vol 14 (7) ◽  
pp. 314
Author(s):  
Najam Iqbal ◽  
Muhammad Saqib Manzoor ◽  
Muhammad Ishaq Bhatti
Keyword(s):  
Stock Returns ◽  
Garch Model ◽  
Bad News ◽  
Good News ◽  
Fiscal Policies ◽  
News Shocks ◽  
Australian Health ◽  
Egarch Model ◽  
Negative Effect ◽  
The Garch Model

This paper studies the effect of COVID-19 on the volatility of Australian stock returns and the effect of negative and positive news (shocks) by investigating the asymmetric nature of the shocks and leverage impact on volatility. We employ a generalised autoregressive conditional heteroskedasticity (GARCH) model and extend the analysis using the exponential GARCH (EGARCH) model to capture asymmetry and allegedly leverage. We proxy the news related to the negative effect of COVID-19 on the Australian health system and its economy as bad news, and on the other hand, measures taken by government economic stimulus packages through their monetary and fiscal policies as good news. The S&P ASX200 (ASX-200) index is used as a proxy to the Australian stock market, and we use value-weighted returns of the stocks listed on ASX-200 for the period 27 January 2020 to 29 December 2020. The empirical results suggest the EGARCH model fits better in capturing asymmetry and leverage than the GARCH model in estimating the volatility of the Australian stock returns. However, another interesting finding is that the EGARCH model with volatility equation without news demonstrates a larger (smaller) leverage effect of the negative (positive) shocks on the conditional volatility compared to its variant with the news.

scholarly journals Asymmetric Information and Volatility of Stock Returns in Nigeria

2017 ◽  
Vol 9 (3) ◽  
pp. 220 ◽  
Author(s):  
Joshua Odutola Omokehinde ◽  
Matthew Adeolu Abata ◽  
Russell Olukayode Christopher Somoye ◽  
Stephen Oseko Migiro
Keyword(s):  
Asymmetric Information ◽  
Stock Returns ◽  
Global Financial Crisis ◽  
Bad News ◽  
Good News ◽  
Significance Level ◽  
Asymmetric Power ◽  
Long Time ◽  
Best Fit ◽  
Total Impact

This paper investigates the effect of asymmetric information on volatility of stock returns in Nigeria using the best-fit Asymmetric Power Autoregressive Conditional Heteroskedasticity, APARCH (1,1) model, under the Generalized Error Distribution (GED) at 1% significance level from 3 January 2000 to 29 November 2016. The descriptive statistical results showed that the returns were not normally and linearly distributed, with strong evidence of a heteroskedasticity effect. The results of the analysis also confirmed the effect of asymmetric information on the volatility of stock returns in the Nigerian stock market. The asymmetric parameter (γ) was negative at (-1.00), which is statistically significant at 1% level. This confirms that there is an asymmetric or leverage effect where bad news had a more destabilizing effect on the volatility of stock returns than good news. The total impact of bad news on volatility was explosive at 2.0, during the period under review. Also, the volatility persistence which is measured by the sum of ARCH(α) and GARCH(β) stood at 1.695950. This is above unity and suggests that volatility takes a long time to attenuate in Nigeria. This could be largely ascribed to the persistent effect of the 2008 global financial crisis, which probably eroded investors’ confidence in the market.

scholarly journals Asymmetric Information and Volatility of Stock Returns in Nigeria

2017 ◽  
Vol 9 (3(J)) ◽  
pp. 220-231
Author(s):  
Joshua Odutola Omokehinde ◽  
Matthew Adeolu Abata ◽  
Olukayode Russell ◽  
Stephen Oseko Migiro ◽  
Christopher Somoye
Keyword(s):  
Asymmetric Information ◽  
Stock Returns ◽  
Global Financial Crisis ◽  
Bad News ◽  
Good News ◽  
Significance Level ◽  
Asymmetric Power ◽  
Long Time ◽  
Best Fit ◽  
Total Impact

This paper investigates the effect of asymmetric information on volatility of stock returns in Nigeria using the best-fit Asymmetric Power Autoregressive Conditional Heteroskedasticity, APARCH (1,1) model, under the Generalized Error Distribution (GED) at 1% significance level from 3 January 2000 to 29 November 2016. The descriptive statistical results showed that the returns were not normally and linearly distributed, with strong evidence of a heteroskedasticity effect. The results of the analysis also confirmed the effect of asymmetric information on the volatility of stock returns in the Nigerian stock market. The asymmetric parameter (γ) was negative at (-1.00), which is statistically significant at 1% level. This confirms that there is an asymmetric or leverage effect where bad news had a more destabilizing effect on the volatility of stock returns than good news. The total impact of bad news on volatility was explosive at 2.0, during the period under review. Also, the volatility persistence which is measured by the sum of ARCH(α) and GARCH(β) stood at 1.695950. This is above unity and suggests that volatility takes a long time to attenuate in Nigeria. This could be largely ascribed to the persistent effect of the 2008 global financial crisis, which probably eroded investors’ confidence in the market.

scholarly journals Firm Valuation, Market Responses, And Accounting Conservatism

2013 ◽  
Vol 29 (3) ◽  
pp. 793
Author(s):  
Karin A. Petruska ◽  
Gulraze Wakil
Keyword(s):  
Stock Returns ◽  
Value Relevance ◽  
Firm Valuation ◽  
Financial Information ◽  
Accounting Conservatism ◽  
Compelling Evidence ◽  
Font Size ◽  
Market Responses ◽  
Over Time

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">This study examines whether the components of accounting conservatism as described in Watts (2003a): contracting, litigation, regulation, and taxation, provide insight on the value relevance of financial information. During the years 1993 through 2009, we explore whether these four factors are value relevant in capturing information in contemporaneous stock returns and prices and whether the trends in value relevance for these drivers vary across time. Specifically, our study aids in helping to reconcile the competing results of Balachandran and Mohanram (2011), who state that there is no compelling evidence that firms with higher levels of accounting conservatism exhibit decreasing levels of value relevance, and Lev and Zarowin (1999), who suggest that accounting conservatism is a factor causing a decline in the usefulness of financial information over time. Our results provide evidence that the level of contracting, litigation, and regulation are associated with returns and prices and their value relevance has not decreased over time, findings which differ from Lev and Zarowin (1999), and support Balachandran and Mohanram (2011), such that the expectation of these drivers are associated with value relevance. In addition, we find less consistent evidence that the taxation explanation of accounting conservatism is associated with value relevance. </span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Accounting Conservatism and Incentives: Intertemporal Considerations

2018 ◽  
Vol 93 (6) ◽  
pp. 181-201 ◽  
Author(s):  
Jonathan C. Glover ◽  
Haijin H. Lin
Keyword(s):  
Accounting Conservatism ◽  
Fine Tuning ◽  
Bad News ◽  
Good News ◽  
Accounting System ◽  
Task Setting ◽  
Downward Bias ◽  
Period Performance ◽  
Second Period

ABSTRACT We study intertemporal incentive properties of conditional accounting conservatism. Conservatism has detrimental and beneficial properties. In our first model, conservatism introduces downward bias in the first period; any understatement of first-period performance is reversed in the second period. A conservative bias is not costly in the first period but instead is costly in the second period when a new manager may be rewarded for the performance of his predecessor. In an extension on learning, we illustrate a beneficial role of conservatism in fine-tuning incentives. In the second model, conservatism is modeled as recognizing effort-independent bad news early and good news late. Recognizing bad news early can be optimal because of intertemporal rent shifting, which improves incentives via an “incentive spillback.” We also study overlapping projects (a multi-task setting) in which an interior accounting system can be optimal to avoid making one of the overlapping projects an incentive bottleneck. JEL Classifications: D21; D74; D82; D86.

scholarly journals The Effect of Board Composition on Conservatism: Empirical Evidence from Tehran Stock Exchange (TSE)

2012 ◽  
Vol 3 (1) ◽  
pp. 17-24
Author(s):  
Keramat Ollah Heydari ◽  
Saber Samadi . ◽  
Hamid Asadzadeh . ◽  
Ahmad Kazemi Margavi . ◽  
Hemad Nazari .
Keyword(s):  
Data Analysis ◽  
Stock Returns ◽  
Board Of Directors ◽  
Capital Market ◽  
Stock Exchange ◽  
Financial Statements ◽  
Bad News ◽  
Good News ◽  
Board Composition ◽  
The Board Of Directors

Conservative is misinterpreted as capturing accountants 'tendency to require higher degree of verification for recognizing good news than bad news in financial statements. Under this interpretation of conservatism, earnings reflect bad news more quickly than good news. By using firms' stock returns to measure news, the asymmetric time lineless of recognizing good news and bad news can be examined as a measure of conservative behavior and as them an in question of this research in Irani and capital market. This research examines effect of composition of the board of directors of the companies listed in Tehran Stock Exchange (TSE) on conservative. Data analysis for seven years (2003-2010) shows that companies with a more in dependent board are more conservative. It means that these companies report bad news more timeliness than good news. The results of the research results confirm and reinforce previous researches.

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