The paper extends Basu (1997) measurement, and further examines the relative recognition speed of news itself in extent of conservatism. Basu (1997) first investigates the conditional conservatism, and employs positive (negative) returns as proxies of good (bad) news. Under conditional conservatism, firms recognize bad news earlier than good news.
Hence, he suggests that the different earnings responses (DERs) to the news are extent of conservatism.
Basu (1997) considers only the asymmetric timeliness of earnings in concurrent period, but the earnings responses to good (bad) news change in each period. Lin and Liu (2012) find that asymmetric timeliness changes in each period (multi-period effect), and suggest that multi-period effect should be considered in measurement of conservatism.
The main empirical research in the paper is to measure relative recognition speed of news itself in asymmetric timeliness under conservatism. Basu (1997) and Lin and Liu (2012) measure the different speeds of news recognition between good news and bad news, but they don’t consider the relative recognition speed of news itself. The difference in speed of news recognition exists even in the same type of news (good news or bad news), and affects the news recognition under conservatism.
To measure the impact of speed of recognition of news itself, I classify news into Future Group and Current Group. The news in Future Group is expected to be reflected in longer-term periods than in Current Group. But it’s difficult to measure the information in
32
future periods, and thus the news in Future Group contains more uncertainties than in Current Group. Hence, Firms take more conservative accountings (i.e. more asymmetric timeliness) to recognize news in Future Group. Namely, firms take more time to verify the good news, but pre-recognize bad news in shorter-term periods to avoid overstatement of net income in Future Group. Due to the uncertainties of news in Future Group, the asymmetric timeliness in Future Group is magnified more than in Current Group. I argue that Basu (1997) measurement only captures part of conservatism, and the different recognition speeds of news itself should also be considered.
Furthermore, I argue that Lin and Liu (2012) measurement should consider the concept of speed of news recognition itself to capture full conservatism. Considering the different speeds of news recognition itself, the recognitions of bad news and good news alter in each period. Firms recognize more information of bad news in Future Group in short-term periods, and thus the earnings responses to bad news in Future Group decay in faster pace than in Current Group. In another aspect, information of good news in Future Group is recognized in longer-term periods than in Current Group. Namely, the earnings responses to good news in Future Group is more than in Current Group in long-term periods. Due to the different moving directions (decrease and increase) in earnings responses to bad news and good news, the magnification effect of asymmetric timeliness decays in long-term periods. It’s suggested that when measuring extent of conservatism, the news should be compared in the same group and the same period. Otherwise, the asymmetric timeliness of earnings might contain bias
33
due to magnification effect in Future Group in multi-period.
There are some limitations in my research. First, I collect earnings data of S&P 500 firms between years 2000-2010.Firms recognize gain and loss depending on the accounting system, but the accounting system might alter with periods. Hence, the changes in accounting system might cause the data of earnings in my research loss consistency. Second, the earnings data is collected from WRDS. Although I get the complete and audited earnings data of S&P 500 firms, it’s difficult to ascertain that firms don’t make fraud or accounting mistakes in financial statement. Hence, the limitation in correctness of earnings data might affect my research.
The following lists some suggestion in my research. First, it’s difficult to diagnose the pure “Current Group” and “Future Group” in real world. To measure the speed of recognition of news in Basu (1997) measurement, I classify the news directly into “Current Group” and
“Future Group”, but I don’t further measure the degree of speed of news recognition in samples. The later studies may further measure “Current Group” and “Future Group” by the degree of relative news recognition speed. The second suggestion is that three-day returns and annual earnings are employed as variables to capture the earnings-returns relation in multi-period in my study. Due to the difference in daily and annual information, there might contain noise between short-window returns and annual earnings. Employing short-term earnings might mitigate the noise between short-windows returns and earnings, but annual earnings are employed due to annualized news data. Though I still captured the relation
34
between long-term period earnings and returns, but if it’s possible, I suggest that the later studies would adopt quarterly earnings for specific news to reduce the noise between short-window returns and yearly earnings in multi-period.
35
Reference
Ball, R. and P. Brown, 1968. An empirical evaluation of accounting income numbers.
Journal of Accounting Research 6: 159-178.
Basu, S., 1997. The conservatism principle and the asymmetric timeliness of earnings.
Journal of Accounting and Economics 24: 3-37.
Basu, S., 2005. Discussion of Conditional and Unconditional Conservatism：Concepts and
Modeling Review of Accounting Studies 10: 311-321.
Beaver, W. H., R. A. Lambert, and S. G. Ryan, 1987. The information content of security prices: a second look. Journal of Accounting Research 9: 139-157.
Beaver, W. H. and S. G. Ryan, 2005. Conditional and unconditional conservatism:
concepts and modeling. Review of Accounting Studies 10: 269-309.
Lin, C. Y. and C. C. Liu, 2012. Effects of nonlinearity and multi-period lags on Basu (1997) measure. Journal of Financial Studies 20: 1-32.
Shroff, P. K., R. Venkataraman, and S. Zhang, 2013. The conservatism principle and the asymmetric timeliness of earnings: an event-based approach. Contemporary Accounting
Research 30: 215-241.
Thompson II, R. B., C. Olsen, and J. R. Dietrich, 1987. Attributes of news about firms: An analysis of firm-specific news reported in the Wall Street Journal Index. Journal of
Accounting Research 25: 245-274.
36
Warfield, T. D. and J.J Wild. 1992. Accounting recognition and the relevance of earnings as an explanatory variable for returns. The Accounting Review 4:821-842
Watt, R. L. 2003a. Conservatism in accounting part I: Explanations and implications
Accounting Horizons 17:207-221
37
Accounting Mistakes C 55
Tyco International Ltd. is investigating allegations of "improper" payments made by a non-U.S. subsidiary. Without disclosing the location of the unit, Tyco said the alleged misconduct took place from 1999 to 2003, according to a Securities and Exchange Commission filing. The Bermuda-based conglomerate said it is also trying to determine whether the payments were correctly recorded in the subsidiary's books.
Appendix
Appendix A. Categories of News Panel A. Accounting / Corporate
Description of News Categories： The changes in companies’ accounting system, fiscal year and corporate by laws The category contains 187 samples (including 80 “F” and 107 “C”)
News Type Group N Example
Accounting Principle
change F 39
BB&T Corp.'s second-quarter net income fell 3.3%, hurt by a lease- accounting adjustment, though the Winston-Salem, N.C., bank-holding company said core operations benefited from growth in loans and fees and improved credit quality. BB&T reported net of $386.8 million, or 70 cents a share, compared with $400.1 million, or 72 cents a share, a year earlier. The latest quarter included a charge of $26.6 million, or five cents a share, related to property and equipment leases.
Accounting Fraudulence C 22
A former Bank of America Corp. executive alleged in an arbitration filing that the bank used "creative accounting" in booking financial losses and that executives were
inappropriately ordered to make charitable and political contributions at the behest of the bank. The allegations are part of a claim filed yesterday by former Bank of America executive Duncan Goldie-Morrison with the National Association of Securities Dealers, which hears employment claims and other disputes in the securities industry. Until March, Mr. Goldie-Morrison was one of the highest-ranking executives at the bank's corporate- and investment-banking division. He ran the debt-raising business for bank clients foreign- exchange products and fixed-income research.
38
F 5
NEW YORK -- Avon Products Inc., the big direct seller of cosmetics and jewelry, said the Securities and Exchange Commission is investigating a $10 million charge the company took in 1999 related to the write-off of computer software. The company "firmly believes that it was properly treated as a special charge," said Brian Martin, an Avonspokesman. "It appears to us that the SEC may be questioning more the size -- whether it should have been a larger or a smaller charge -- and the timing of the charge.
Accounting Policies (of corporation)
C 6
Tenet has struggled since disclosing in October that its once-robust growth depended largely on outlier payments. The payments are intended to offset the cost of treating the sickest patients, but Tenet's use of them effectively gouged the Medicare system. Stop-loss payments serve a similar function for private insurers. The disclosure triggered a
management shake-up, a change in the company's billing policies, various government investigations and sharply reduced earnings forecasts.
F 10
AOL Time Warner Inc. will reclassify $1.5 billion of its mandatory convertible preferred stock issued to Comcast Corp. as liabilities, reducing shareholder equity. The New York media conglomerate said the reclassification in the quarter ending Sept. 30 is required to comply with a new accounting rule. The rule, FAS 150, mandates that an issuer classify certain financial instruments as a liability, or an asset in some circumstances.
Accounting Disputes
Settlement C 24
Citigroup Inc. agreed to settle a lengthy federal investigation into its accounting of
Argentina bonds during the debt crisis earlier this decade, a move that will resolve another of the bank's outstanding legal issues. In reaching the settlement with the Securities and Exchange Commission, Citigroup agreed to cease and desist from future securities-law violations, a relatively light sanction. The SEC alleged Citigroup failed to keep accurate books and records and didn't maintain sufficient internal controls over accounting.
39
F 5
Wall Street has a lot riding on the financial industry's effort to ease frozen credit markets by creating an $80 billion rescue fund -- but no company more than Citigroup Inc.
Supporting these off-balance-sheet funds, known as structured investment vehicles or SIVs, is the heart of the rescue effort led by Citigroup, J.P. Morgan Chase & Co. and Bank of America Corp. Accounting groups have raised the question of whether Citigroup and other managers of the SIVs should account for the funds, many of which face potential losses, on their own balance sheets.
Other Information F 6 Audit Regulation
F 15 Corporate Bylaw
40
Appendix A. Categories of News Panel B. Asset Changes
Description of News Categories：The changes in companies’ asset, department and business.
The category contains 1922 samples (including 1847 “F” and 75 “C”)
News Type Group N Examples
Acquisitions of Corporate
Entities / Operations F 1195
Wells Fargo & Co. said it agreed to buy ACO Brokerage Holdings Corp., parent of Acordia Inc., a privately held property-and-casualty insurance agency. Terms of the deal weren't disclosed, but Wells Fargo, a San Francisco financial-services company, said the
acquisition of Chicago's Acordia will be its largest insurance-company purchase to date.
Acquisitions of Tangible
and Intangible Assets F 82
United Parcel Service Inc. confirmed an agreement to purchase as many as 35 converted jumbo jets from Boeing Co. in a transaction that could be valued at more than $2 billion.
UPS plans to add the MD-11s to its existing 234-jet fleet, using the freighters from Boeing for international cargo shipments, particularly from the U.S. to Europe and Asia. The contract is a big boost for Boeing's aircraft-services business.
Dispositions of Corporate Entities / Operations
C 10
Agilent Technologies Inc. said it expects to record a gain of between $600 million and $700 million this fiscal year from the sale of its health-care products business to Philips
Electronics NV of the Netherlands. The Palo Alto, Calif., maker of test and measurement equipment agreed in November to sell that unit for $1.7 billion to Philips, the world's largest electronics manufacturer, but it didn't receive U.S. regulatory approval until May 31.
F 319
Boeing Co., Seattle, said it signed an agreement to sell its sensors and electronic-systems unit for about $84 million to DRS Technologies Inc. of Parsippany, N.J. The unit is one of the leading makers of electro-optical airborne and naval surveillance-and-targeting systems,
41
Dispositions of Tangible and Intangible Assets
C 44
El Paso Corp. agreed to sell power plants in Pakistan, Indonesia, Bangladesh and the
Philippines to a unit of U.K. power-investment firm Globeleq Ltd. for about $109 million as part of its plan to divest itself of its Asian power-plant portfolio. The sales are expected to be completed by the end of the fourth quarter, the Houston natural-gas company said. El Paso said it has contracted to sell or has sold all but one of its Asian power plants, for expected proceeds of $463 million.
F 58
Brascan Corp. agreed to buy Weyerhaeuser Co.'s timberlands and sawmills along the British Columbia coast for $1.1 billion. The assets include 635,000 acres of private
timberlands, annual harvesting rights to 4.7 million cubic yards of timber on land owned by the provincial government, and five lumber mills with total annual production of 690 million board feet.
Spin off Operations F 16
The spinoff was announced last August by Abbott Chief Executive Miles White, who said it would allow Abbott to concentrate on higher- growth segments of its medical-products business.
Capital Expansion Plans F 54
Norfolk Southern Corp. plans to spend $747.2 million in capital projects this year, primarily to maintain its railroad infrastructure and allow for expansion of track, locomotives and equipment. The plan includes capacity increases to eliminate bottlenecks in Ohio and Pennsylvania.
Form a Joint Venture F 75
J.P. Morgan & Co. will announce today a new venture with Electronic Data Systems Corp. allowing clients to use Internet-based technology to outsource much of the
trade-processing of derivatives trades. The venture, called Arcordia, is one of the first major new initiatives to come out of LabMorgan, the New York bank's new Web incubator.
42
Merge of Operations F 12
AT&T Corp., which is close to an agreement with Comcast Corp. that will allow both companies to resume talks on merging their cable operations, has also spoken with all four regional Bell companies about possibly merging with or acquiring AT&T's business and consumer long-distance telephone units, according to people close to the situation.
Restructuring Plan or Reorganization
C 11 Procter & Gamble Co. said its fiscal fourth-quarter earnings would be at the high-end of its forecast, driven by gains in volume and sales and by gross-margin improvements.
F 23
Intel Corp. announced a major reorganization of its struggling communications efforts, less than a week after announcing a $600 million write-off in the company's wireless chip business. As part of the changes, Intel's communications group, which makes chips for networking devices, will absorb the separate wireless communications and computing group, which mainly supplies chips for cellular phones.
Write off the Value of Assets
C 7 CSX's first-quarter net reflected increases in some expenses, including write-downs of investments in non-rail affiliates that offset improvements in operating income.
F 4
Managed-care concerns such as Humana have been hit hard by federal and state reimbursement cuts and higher costs; Physician Corp. of America additionally has had difficulty with its financial relationships with doctors and other providers as well as its troubled workers' compensation business. Humana said it is evaluating the goodwill
associated with certain acquisitions, including the purchase of Physician Corp. of America.
Other Information
F 1 Sale Leaseback
C 1
Removed from or Cancelation of a Joint Venture
F 3
C 2
Shut down
F 5
43
Appendix A. Categories of News Panel C. Accounting / Corporate
Description of News Categories：The changes in companies’ liabilities or equity to gain (lessen) capital.
The category contains 57 samples (including 44 “F” and 13 “C”)
News Type Group N Examples
Liability Repay / Buyback F 9
Insurance giant American International Group Inc. said it is bailing out a $2.5 billion structured investment vehicle, or SIV, managed by its derivatives arm. Under the rescue plan, an arm of AIG will repay the senior debt of the SIV, Nightingale Finance, as it matures and keep financing its portfolio of bank debt and asset-backed securities with repurchase agreements, a type of short-term funding.
Liability Issue F 35
A Cablevision Systems Corp. unit borrowed $3.5 billion under its credit pact to finance a special dividend proposed by the company, the cable-television provider said. The
company, based in Bethpage, N.Y., reached an agreement Monday that settled a suit filed by shareholders that sought to prevent the company from paying the dividend.
Stock Option C 13
It said it took a $55 million charge for stock options exercised last year and a $57 million charge for increasing the strike price for options that have not yet been exercised.
UnitedHealth spent the last year trying to recover from a backdating scandal, which resulted in the resignation of Chief Executive William McGuire.
44
Appendix A. Categories of News Panel D. Forecast / Analysis
Description of News Categories：Forecast and analysis to changes in companies’ operations.
The category contains 57 samples (including 44 “F” and 13 “C”)
News Type Group N Examples
Sales Growth (Down)
C 596
3M Co. raised its first-quarter forecast saying sales growth was good in its industrial, safety, consumer and electronics businesses. The St. Paul, Minn., maker of thousands of products from electronics to notepads said it expects to report earnings of $1.15 to $1.16 a share, up from its earlier estimate of $1.10 to $1.14 a share. The manufacturer also said it expects sales growth of 8%, rather than the 4% to 7% it had forecast.
F 23
Amgen Inc. said it expects accelerating earnings and revenue growth next year. The biotechnology company said it expects per-share earnings to grow at least 20% in the coming year, compared with its estimate of at least 10% growth in 2001. Product sales, bolstered by a recently approved second-generation anemia treatment Aranesp, could rise as much as 19% next year.
Cost Growth (Down)
C 128
Aetna Inc. warned that its second-quarter earnings would be far lower than expected because of unexpectedly high medical costs, a setback for the nation's largest health insurer as it tries to turn itself around. Investors and analysts said Aetna management has been distracted by internal turmoil surrounding the insurer's decision to split in two and generally recast the company.
45
F 10
Ford Motor Co.'s European arm is seeking to reduce spending on the bulk of its components by as much as 13%, or more than $1 billion, over the next several years.
Driving down component costs in 2004 is a key to Ford of Europe's overall turnaround strategy, Lewis Booth, the division's chief operating officer, said at the Geneva Motor Show. Last year, Ford of Europe lost $1.1 billion and is expected to lose $100 million to
$200 million this year.
Market Competition C 19
Advanced Micro Devices Inc.'s second-quarter net income plunged 92%, reflecting falling demand for some memory chips as well as a fierce price battle with rival Intel Corp. amid slowing demand for personal computers. The Sunnyvale, Calif., semiconductor maker said sales may decline further in the third quarter, which could result in a loss for the period. AMD also said it is reducing 2001 capital-spending plans to $900 million from $1 billion and may scale it back further.
Price Up (Down) C 36
Best Buy Co. lowered its estimate for fiscal fourth-quarter earnings, hurt by inventory markdowns and lower prices from promotions. The Richfield, Minn., consumer-electronics retailer said it expects to report earnings at the low end of, or slightly below, its forecast of
Best Buy Co. lowered its estimate for fiscal fourth-quarter earnings, hurt by inventory markdowns and lower prices from promotions. The Richfield, Minn., consumer-electronics retailer said it expects to report earnings at the low end of, or slightly below, its forecast of