I interpret conservatism as resulting in earnings reflecting ‘bad news’ more quickly than ‘good news’. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms’ stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. ¢ 1997 Elsevier Science B.V. All rights reserved.

We develop new distribution discontinuity tests conditional on multiple explanatory variables for analyzing meet-or-just-beat behavior around benchmarks. These tests combine Burgstahler and Dichev's (1997) meet-or-just-beat intuition with a flexible statistical model that addresses important limitations of the existing tests. Our method considerably outperforms logit-based tests of distribution discontinuity determinants and changes the interpretation of a major finding in the earnings discontinuity literature. As a secondary benefit, it also has slightly higher statistical power than histogram-based tests of distribution discontinuity existence. Our method is robust, easy to implement using our publicly available Stata command, and could benefit researchers in many fields.

Prior research concludes that financial analysts do not process public information efficiently in generating their earnings forecasts. The ordinary least squares (OLS) regression-based tests used in prior studies assume implicitly that analysts face a quadratic loss function. In contrast, we argue that analysts likely face a linear loss function, and hence, try to minimize their absolute forecast errors. We conduct and compare rational expectations tests using these two alternative loss functions. We reproduce most prior findings of forecast inefficiency with OLS regressions, but find virtually no evidence of forecast inefficiency with least absolute deviation regressions, where we explicitly assume a linear loss function.

ABSTRACT We study nonofficer directors’ influence on the accounting conservatism of U.S. public firms. Between 1986 and 2002, all 50 U.S. states enacted laws that limited nonofficer directors’ litigation risk but often left officer directors’ litigation risk unchanged. We find that conditional conservatism decreased after the staggered enactments of the laws, which we attribute to less nonofficer director monitoring of financial reporting in affected firms. Conservatism fell less when shareholder or debtholder power was high, consistent with major stakeholders moderating the influence of nonofficer directors. We verify that our results stem from reductions in the asymmetric timeliness of accruals and, specifically, its current assets components. We also show that affected firms switched away from Big N auditors more often, which reduced these firms’ commitment to conservative financial reports.

Large net loan charge-offs are frequently associated with large decreases in nonperforming loans and large increases in loan loss provisions, inducing a V-shaped relation between loan loss provisions and nonperforming loan changes. Failure to model the asymmetry attributable to net loan charge-offs can change inferences about the presence of earnings management and the effects of delayed loan loss recognition in prior papers that assumed linearity. Future researchers should either include net loan charge-offs in linear models of loan loss provisions or explicitly model the asymmetry induced by omitting net loan charge-offs.

ABSTRACT We show that firms' investment opportunity sets (IOS) are multidimensional. Analyzing Form 10-K texts, we identify 445 unique keywords that predict firms' future investments during 1995–2009 and combine them into 43 underlying factors. Industry-specific factors include Bio-Pharma, Banking, Information Technology, Oil and Gas, and Retail Stores, while more general factors include Equity Intensity, Debt Intensity, Lease, Going Concern, and Acquisition. These factors form our multidimensional measures of IOS. They outperform Tobin's Q and/or industry fixed effects, in predicting future out-of-sample (2010–2015) investments and related corporate policies, and even inform incrementally over lagged dependent variables. We trace the factors' improved predictive power to their multidimensional nature, which captures IOS-related variation within and between industries, and stability in IOS that allows 10-K texts to be more informative. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G31; G32; G35; M41; M21.

Sales decreases affect earnings more than sales increases because of cost stickiness. We hypothesize that this correlated omitted variable constitutes a confounding effect in standard asymmetric timeliness models. Controlling for a piecewise linear effect of sales changes in these models decreases the measured asymmetric timeliness significantly and changes inferences about the average level of conservatism and the extent of cross-sectional variation in conservatism. Validation tests confirm that the asymmetry for sales changes is consistent with sticky costs and is distinct from conditional conservatism. Future empirical research on conditional conservatism should recognize the potential confounding effect of sticky costs.