scholarly journals Investigation on Information Content of Conservative and Non-Conservative Accounting Earnings

2012 ◽  
Vol 1 (4) ◽  
pp. 53-58
Author(s):  
Younes Badavar Nahandi ◽  
Morteza Khanlari
Keyword(s):  
Information Content ◽  
Accounting Earnings ◽  
Conservative Accounting

Conservatism, Optimal Disclosure Policy, and the Timeliness of Financial Reports

2001 ◽  
Vol 76 (4) ◽  
pp. 471-493 ◽  
Author(s):  
Frank B. Gigler ◽  
Thomas Hemmer
Keyword(s):  
Financial Reporting ◽  
Alternative Explanation ◽  
Bad News ◽  
Good News ◽  
Accounting System ◽  
Voluntary Disclosures ◽  
Accounting Earnings ◽  
Financial Reports ◽  
Disclosure Policy ◽  
Conservative Accounting

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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