Conservatism and the Informational Content of Earnings

Document Type : Research Paper

Authors

1 Associate Prof., Faculty of Management and Accounting, Islamic Azad University, Firoozkuh Branch, Firoozkuh, Iran

2 MSc. of Accounting, Faculty of Management and Accounting, Islamic Azad University, Firoozkuh Branch, Firoozkuh, Iran

Abstract

This paper examines the relationship between accounting conservatism and informational content of earnings using data of 167 firms listed on the Tehran Stock Exchange during 2004-2013. Accounting conservatism is measured based on Khan and Watts' (2009) model and Feltham and Ohlsson (1995) price model and Easton and Hariss (1991) return models were used to evaluate the informational content of earnings across different partitions of conservatism. The results of price and return models estimations on two and three partitions (levels) of conservatism show an inverse relation between conservatism and informational content of earnings. That is, the explanatory powers of price and return models are lower for the partition of high conservatism than the partition of low conservatism. Also, an inverse relation between stock returns and conservatism is observed. Our results are robust to sensitivity analyses.

Keywords

References

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Accounting and Auditing Review
Volume 23, Issue 4
2016
Pages 435-460

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