Information Consequences of Accounting Conservatism

We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to...

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Bibliographic Details
Published in:The European accounting review 2014-01, Vol.23 (2), p.173-198
Main Authors: García Lara, Juan Manuel, García Osma, Beatriz, Penalva, Fernando
Format: Article
Language:English
Subjects:
Accounting procedures
Capital markets
Information science
Rates of return
Spread
Studies
Volatility
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Summary:We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to subsequent decreases in information asymmetries between firm insiders and outsiders. We predict and test if this decrease in information asymmetries manifests itself through: (a) a decrease in the bid-ask spread and in stock-returns volatility, and (b) an improved information environment for financial analysts, leading to more precise and less dispersed forecasts, and to more analysts following the firm. Using a large US sample for the period 1977-2007 and several proxies for conservatism we find robust evidence consistent with our expectations. Our results are in line with conservatism being useful not only for debt-holders, but also for equity-holders.
ISSN:0963-8180
1468-4497
DOI:10.1080/09638180.2014.882263