Abstract We investigate the effects of accounting conservatism on the relevance-reliability trade... more Abstract We investigate the effects of accounting conservatism on the relevance-reliability trade-off by examining the diverging time-series trends in the predictive ability of current earnings for future cash flows versus future earnings. Prior literature has suggested that cash flow predictability is related to earnings relevance and earnings predictability to earnings reliability. With a constant sample of 448 firms over a 33-year period from 1973 to 2005, we find that an increase in accounting conservatism is associated with a decrease ...
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cou... more ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cours de la période s’échelonnant de 1973 à 2005 est associée aux facteurs suivants : 1) les propriétés prévisionnelles croissantes des résultats de l’exercice en ce qui a trait aux flux de trésorerie futurs et 2) les propriétés prévisionnelles décroissantes des résultats de l’exercice en ce qui a trait aux résultats futurs. Les auteurs constatent également que l’utilité des résultats pour expliquer le cours des actions par rapport aux valeurs comptables est en relation positive avec la fiabilité, mais non avec la pertinence. Les résultats de l’étude se vérifient pour l’échantillon constant et l’échantillon intégral, à la fois dans les analyses sur échantillon et hors échantillon, et ils résistent à l’utilisation d’autres indicateurs de pertinence, de fiabilité, d’utilité des résultats et de prudence. Les conclusions des auteurs au sujet des relations entre la prudence, la pertinence, la fiabilité et l’utilité semblent accréditer l’existence d’un compromis entre pertinence et fiabilité et paraissent indiquer que l’adoption d’un nombre croissant de normes comptables prudentes pourrait être préjudiciable à l’utilité des résultats en raison d’une incidence négative sur la fiabilité.
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
... Flow Information During the LTCM Crisis Time Variability in Market Risk Aversion Slippage and... more ... Flow Information During the LTCM Crisis Time Variability in Market Risk Aversion Slippage and the Choice of Market or Limit Orders in Futures Trading Internalization and Market Quality: An Empirical Investigation Wing Hong Chan, Ranjinl Jha, and Madhu Kalimipalli Fang Cai ...
We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008... more We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008 sub-prime crisis in the United States financial sector. We find that Canadian banks averted the effects of financial contagion during the actual crisis period but were affected by contagion in the post-crisis period. Canadian banks with higher capitalization and liquidity withstood the effects of the financial crisis better. We also find that higher asset quality transparency partially offsets the impact of contagion during the sub-prime crisis period. However, despite the strength of the Canadian banking sector and its prudent regulation, financial contagion could only be delayed but not prevented. JEL classification: G01; G21
ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cou... more ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cours de la période s’échelonnant de 1973 à 2005 est associée aux facteurs suivants : 1) les propriétés prévisionnelles croissantes des résultats de l’exercice en ce qui a trait aux flux de trésorerie futurs et 2) les propriétés prévisionnelles décroissantes des résultats de l’exercice en ce qui a trait aux résultats futurs. Les auteurs constatent également que l’utilité des résultats pour expliquer le cours des actions par rapport aux valeurs comptables est en relation positive avec la fiabilité, mais non avec la pertinence. Les résultats de l’étude se vérifient pour l’échantillon constant et l’échantillon intégral, à la fois dans les analyses sur échantillon et hors échantillon, et ils résistent à l’utilisation d’autres indicateurs de pertinence, de fiabilité, d’utilité des résultats et de prudence. Les conclusions des auteurs au sujet des relations entre la prudence, la pertinence, la fiabilité et l’utilité semblent accréditer l’existence d’un compromis entre pertinence et fiabilité et paraissent indiquer que l’adoption d’un nombre croissant de normes comptables prudentes pourrait être préjudiciable à l’utilité des résultats en raison d’une incidence négative sur la fiabilité.
ABSTRACT We examine whether the Canadian banking sector was afflicted by financial contagion from... more ABSTRACT We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008 sub-prime crisis in the United States financial sector. We find that Canadian banks averted the effects of financial contagion during the actual crisis period but were affected by contagion in the post-crisis period. Canadian banks with higher capitalization and liquidity withstood the effects of the financial crisis better. We also find that higher asset quality transparency partially offsets the impact of contagion during the sub-prime crisis period. However, despite the strength of the Canadian banking sector and its prudent regulation, financial contagion could only be delayed but not prevented.
ABSTRACT We establish a link between earnings volatility and earnings quality, and show that both... more ABSTRACT We establish a link between earnings volatility and earnings quality, and show that both earnings volatility and earnings quality contribute to the trend in idiosyncratic return volatility. We examine the trend in earnings volatility and its components during the period 1978-2006 and find that both cash flow volatility and accruals volatility have been increasing and that the contemporaneous correlation between cash flow and accruals has become less negative. The key driver for the deteriorating earnings quality measure is the less negative contemporaneous correlation between cash flow and accruals. We view cash flow volatility as reflecting the uncertainty in firms' real operating activities, accruals volatility as reflecting firms' absolute financial reporting uncertainty, and the cash flow-accruals correlation as reflecting firms' relative degree of earnings management. We find that both the marginal contribution and overall contribution of the cash flow volatility trend to the earnings volatility trend dominate those of accrual volatility and those of correlation. The cash flow volatility trend is positively associated with the idiosyncratic return volatility trend, reflecting the impacts of firms' economic operations. On the financial reporting side, the return volatility trend is positively associated with the earnings quality trend yet negatively associated with the accrual volatility trend. Collectively, the trends in earnings volatility and its components and the trend in earnings quality help explain the documented increasing idiosyncratic stock return volatility. In sum, this paper contributes to the literature in a number of ways. First, we identify the drivers for the trend in earnings volatility. While a few papers have separately identified the trend either in earnings or cash flow volatilities, this paper brings these strands of literature together. Our main finding is that cash flow volatility is the primary but not the only driver for earnings volatility. We also document the role of management opportunism in contributing to the earnings volatility trend. Second, we find that earnings quality, financial reporting volatility, and cash flow volatility coexist in explaining idiosyncratic stock return volatility. Our results highlight the roles of both operating volatility (economic forces) and financial reporting quality (managerial opportunism) in explaining earnings volatility and idiosyncratic return volatility, with economic forces dominating managerial opportunism.
We model the temporal properties of the first three moments of asset returns and examine whether ... more We model the temporal properties of the first three moments of asset returns and examine whether incorporating time varying skewness in the underlying asset returns leads to profitable strategies using at-the-money S&P 500 index options. We devise trading rules that incorporate the skewness forecast to trade at-the-money delta-neutral strips, straps and straddles. We find that a simulated trading strategy using a model with both conditional volatility and skewness outperforms the GARCH model before and after adjusting for transaction costs. The results indicate that index option prices for at-the-money options do not reflect time varying skewness. The evidence suggests that mispricing of options may cause the negative skewness in the implicit risk-neutral distribution in option prices.
Bond and stock returns have been observed in the literature to exhibit unconditional skewness and... more Bond and stock returns have been observed in the literature to exhibit unconditional skewness and temporal persistence in conditional skewness. We demonstrate that observed persistence in conditional third central moments can be due to the spillover of conditional variance dynamics.
Abstract: In this paper we examine the effects of performance-based compensation on the quality o... more Abstract: In this paper we examine the effects of performance-based compensation on the quality of internal control. We find that the sensitivities of CEO and CFO option portfolios and long-term incentive plans to stock price changes are negatively related to the propensity to report internal control weaknesses between January 2004 and December 2006. We also find that sensitivity is more strongly related to company-level than account-specific control weaknesses. This relation is stronger for CFOs, the officers primarily responsible for the ...
This study examines whether conditional skewness forecasts of the underlying asset returns can be... more This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness-based option-pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward-looking option implied volatilities, can significantly improve the performance of skewnessbased trades but trading costs considerably weaken the profitability of index option strategies.
We examine the economic benefits of using realized volatility to forecast future implied volatili... more We examine the economic benefits of using realized volatility to forecast future implied volatility for pricing, trading, and hedging in the S&P 500 index options market. We propose an encompassing regression approach to forecast future implied volatility, and hence future option prices, by combining historical realized volatility and current implied volatility. Although the use of realized volatility results in superior performance in the encompassing regressions and out-of-sample option pricing tests, we do not find any significant economic gains in option trading and hedging strategies in the presence of transaction costs.
Journal of Financial and Quantitative Analysis, 2012
Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary a... more Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary accrual volatility and the correlation between pre-managed earnings and discretionary accruals reflective of information quality across firms. These results are robust to controls for firm operating uncertainty, growth options, business cycle variations, and firm age and industry effects, and highlight the importance of managerial discretion in determining idiosyncratic volatility.
We develop conditional alpha performance measures that are consistent with conditional mean-varia... more We develop conditional alpha performance measures that are consistent with conditional mean-variance analysis, conditional Sharpe ratio maximization, and the magnitude and sign of the true conditional time-varying alphas. Conditional Sharpe measures and appraisal ratios follow directly from our analysis. All performance measures are derived from the conditional investment opportunity set and admit interpretations of traditional performance tools where asset moments are given in conditional form. Our empirical analysis of mutual fund returns data from Morningstar demonstrates that the empirical differences between existing measures and our proposed measures are substantive for typical parameterizations.
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
We investigate the effects of accounting conservatism on the relevance-reliability trade-off by e... more We investigate the effects of accounting conservatism on the relevance-reliability trade-off by examining the diverging time-series trends in the predictive ability of current earnings for future cash flows versus future earnings. Prior literature has suggested that cash flow predictability is related to earnings relevance and earnings predictability to earnings reliability. With a constant sample of 448 firms over a 33-year period from 1973 to 2005, we find that an increase in accounting conservatism is associated with a decrease ...
Abstract We investigate the effects of accounting conservatism on the relevance-reliability trade... more Abstract We investigate the effects of accounting conservatism on the relevance-reliability trade-off by examining the diverging time-series trends in the predictive ability of current earnings for future cash flows versus future earnings. Prior literature has suggested that cash flow predictability is related to earnings relevance and earnings predictability to earnings reliability. With a constant sample of 448 firms over a 33-year period from 1973 to 2005, we find that an increase in accounting conservatism is associated with a decrease ...
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cou... more ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cours de la période s’échelonnant de 1973 à 2005 est associée aux facteurs suivants : 1) les propriétés prévisionnelles croissantes des résultats de l’exercice en ce qui a trait aux flux de trésorerie futurs et 2) les propriétés prévisionnelles décroissantes des résultats de l’exercice en ce qui a trait aux résultats futurs. Les auteurs constatent également que l’utilité des résultats pour expliquer le cours des actions par rapport aux valeurs comptables est en relation positive avec la fiabilité, mais non avec la pertinence. Les résultats de l’étude se vérifient pour l’échantillon constant et l’échantillon intégral, à la fois dans les analyses sur échantillon et hors échantillon, et ils résistent à l’utilisation d’autres indicateurs de pertinence, de fiabilité, d’utilité des résultats et de prudence. Les conclusions des auteurs au sujet des relations entre la prudence, la pertinence, la fiabilité et l’utilité semblent accréditer l’existence d’un compromis entre pertinence et fiabilité et paraissent indiquer que l’adoption d’un nombre croissant de normes comptables prudentes pourrait être préjudiciable à l’utilité des résultats en raison d’une incidence négative sur la fiabilité.
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
... Flow Information During the LTCM Crisis Time Variability in Market Risk Aversion Slippage and... more ... Flow Information During the LTCM Crisis Time Variability in Market Risk Aversion Slippage and the Choice of Market or Limit Orders in Futures Trading Internalization and Market Quality: An Empirical Investigation Wing Hong Chan, Ranjinl Jha, and Madhu Kalimipalli Fang Cai ...
We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008... more We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008 sub-prime crisis in the United States financial sector. We find that Canadian banks averted the effects of financial contagion during the actual crisis period but were affected by contagion in the post-crisis period. Canadian banks with higher capitalization and liquidity withstood the effects of the financial crisis better. We also find that higher asset quality transparency partially offsets the impact of contagion during the sub-prime crisis period. However, despite the strength of the Canadian banking sector and its prudent regulation, financial contagion could only be delayed but not prevented. JEL classification: G01; G21
ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cou... more ABSTRACT Selon les observations des auteurs, l’augmentation du degré de prudence comptable au cours de la période s’échelonnant de 1973 à 2005 est associée aux facteurs suivants : 1) les propriétés prévisionnelles croissantes des résultats de l’exercice en ce qui a trait aux flux de trésorerie futurs et 2) les propriétés prévisionnelles décroissantes des résultats de l’exercice en ce qui a trait aux résultats futurs. Les auteurs constatent également que l’utilité des résultats pour expliquer le cours des actions par rapport aux valeurs comptables est en relation positive avec la fiabilité, mais non avec la pertinence. Les résultats de l’étude se vérifient pour l’échantillon constant et l’échantillon intégral, à la fois dans les analyses sur échantillon et hors échantillon, et ils résistent à l’utilisation d’autres indicateurs de pertinence, de fiabilité, d’utilité des résultats et de prudence. Les conclusions des auteurs au sujet des relations entre la prudence, la pertinence, la fiabilité et l’utilité semblent accréditer l’existence d’un compromis entre pertinence et fiabilité et paraissent indiquer que l’adoption d’un nombre croissant de normes comptables prudentes pourrait être préjudiciable à l’utilité des résultats en raison d’une incidence négative sur la fiabilité.
ABSTRACT We examine whether the Canadian banking sector was afflicted by financial contagion from... more ABSTRACT We examine whether the Canadian banking sector was afflicted by financial contagion from the 2008 sub-prime crisis in the United States financial sector. We find that Canadian banks averted the effects of financial contagion during the actual crisis period but were affected by contagion in the post-crisis period. Canadian banks with higher capitalization and liquidity withstood the effects of the financial crisis better. We also find that higher asset quality transparency partially offsets the impact of contagion during the sub-prime crisis period. However, despite the strength of the Canadian banking sector and its prudent regulation, financial contagion could only be delayed but not prevented.
ABSTRACT We establish a link between earnings volatility and earnings quality, and show that both... more ABSTRACT We establish a link between earnings volatility and earnings quality, and show that both earnings volatility and earnings quality contribute to the trend in idiosyncratic return volatility. We examine the trend in earnings volatility and its components during the period 1978-2006 and find that both cash flow volatility and accruals volatility have been increasing and that the contemporaneous correlation between cash flow and accruals has become less negative. The key driver for the deteriorating earnings quality measure is the less negative contemporaneous correlation between cash flow and accruals. We view cash flow volatility as reflecting the uncertainty in firms' real operating activities, accruals volatility as reflecting firms' absolute financial reporting uncertainty, and the cash flow-accruals correlation as reflecting firms' relative degree of earnings management. We find that both the marginal contribution and overall contribution of the cash flow volatility trend to the earnings volatility trend dominate those of accrual volatility and those of correlation. The cash flow volatility trend is positively associated with the idiosyncratic return volatility trend, reflecting the impacts of firms' economic operations. On the financial reporting side, the return volatility trend is positively associated with the earnings quality trend yet negatively associated with the accrual volatility trend. Collectively, the trends in earnings volatility and its components and the trend in earnings quality help explain the documented increasing idiosyncratic stock return volatility. In sum, this paper contributes to the literature in a number of ways. First, we identify the drivers for the trend in earnings volatility. While a few papers have separately identified the trend either in earnings or cash flow volatilities, this paper brings these strands of literature together. Our main finding is that cash flow volatility is the primary but not the only driver for earnings volatility. We also document the role of management opportunism in contributing to the earnings volatility trend. Second, we find that earnings quality, financial reporting volatility, and cash flow volatility coexist in explaining idiosyncratic stock return volatility. Our results highlight the roles of both operating volatility (economic forces) and financial reporting quality (managerial opportunism) in explaining earnings volatility and idiosyncratic return volatility, with economic forces dominating managerial opportunism.
We model the temporal properties of the first three moments of asset returns and examine whether ... more We model the temporal properties of the first three moments of asset returns and examine whether incorporating time varying skewness in the underlying asset returns leads to profitable strategies using at-the-money S&P 500 index options. We devise trading rules that incorporate the skewness forecast to trade at-the-money delta-neutral strips, straps and straddles. We find that a simulated trading strategy using a model with both conditional volatility and skewness outperforms the GARCH model before and after adjusting for transaction costs. The results indicate that index option prices for at-the-money options do not reflect time varying skewness. The evidence suggests that mispricing of options may cause the negative skewness in the implicit risk-neutral distribution in option prices.
Bond and stock returns have been observed in the literature to exhibit unconditional skewness and... more Bond and stock returns have been observed in the literature to exhibit unconditional skewness and temporal persistence in conditional skewness. We demonstrate that observed persistence in conditional third central moments can be due to the spillover of conditional variance dynamics.
Abstract: In this paper we examine the effects of performance-based compensation on the quality o... more Abstract: In this paper we examine the effects of performance-based compensation on the quality of internal control. We find that the sensitivities of CEO and CFO option portfolios and long-term incentive plans to stock price changes are negatively related to the propensity to report internal control weaknesses between January 2004 and December 2006. We also find that sensitivity is more strongly related to company-level than account-specific control weaknesses. This relation is stronger for CFOs, the officers primarily responsible for the ...
This study examines whether conditional skewness forecasts of the underlying asset returns can be... more This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness-based option-pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward-looking option implied volatilities, can significantly improve the performance of skewnessbased trades but trading costs considerably weaken the profitability of index option strategies.
We examine the economic benefits of using realized volatility to forecast future implied volatili... more We examine the economic benefits of using realized volatility to forecast future implied volatility for pricing, trading, and hedging in the S&P 500 index options market. We propose an encompassing regression approach to forecast future implied volatility, and hence future option prices, by combining historical realized volatility and current implied volatility. Although the use of realized volatility results in superior performance in the encompassing regressions and out-of-sample option pricing tests, we do not find any significant economic gains in option trading and hedging strategies in the presence of transaction costs.
Journal of Financial and Quantitative Analysis, 2012
Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary a... more Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary accrual volatility and the correlation between pre-managed earnings and discretionary accruals reflective of information quality across firms. These results are robust to controls for firm operating uncertainty, growth options, business cycle variations, and firm age and industry effects, and highlight the importance of managerial discretion in determining idiosyncratic volatility.
We develop conditional alpha performance measures that are consistent with conditional mean-varia... more We develop conditional alpha performance measures that are consistent with conditional mean-variance analysis, conditional Sharpe ratio maximization, and the magnitude and sign of the true conditional time-varying alphas. Conditional Sharpe measures and appraisal ratios follow directly from our analysis. All performance measures are derived from the conditional investment opportunity set and admit interpretations of traditional performance tools where asset moments are given in conditional form. Our empirical analysis of mutual fund returns data from Morningstar demonstrates that the empirical differences between existing measures and our proposed measures are substantive for typical parameterizations.
This research reports that an increasing level of accounting conservatism over the 1973-2005 peri... more This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., ; and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.
We investigate the effects of accounting conservatism on the relevance-reliability trade-off by e... more We investigate the effects of accounting conservatism on the relevance-reliability trade-off by examining the diverging time-series trends in the predictive ability of current earnings for future cash flows versus future earnings. Prior literature has suggested that cash flow predictability is related to earnings relevance and earnings predictability to earnings reliability. With a constant sample of 448 firms over a 33-year period from 1973 to 2005, we find that an increase in accounting conservatism is associated with a decrease ...
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Papers by Ranjini Jha