We assess earning's lack of timeliness and value-irrelavant noise in earnings as explanations for the weak contemporaneous return-earnings assocation. Earnings lack timeliness because objectivity, verifiability, and conservatism conventions underlie the accounting measurement process. Noise in earnings is uncorrelated with returns in all periods. It likely gets introduced when estimates of future cash flows that differ from the market's estimates are included in earnings determined by accounting rules. Consistent with earning lacking timeliness, we find current and future earnings adjusted for expectational errors explain roughly 3–6 times as much of the annual return variation as current earnings alone.

ABSTRACT The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage. Data Availability: Data are publicly available from sources identified in the article.

ABSTRACT: We document systematic evidence of risk effects of disclosures culled from a virtually exhaustive set of sources from the print medium. We content analyze more than 100,000 disclosure reports by management, analysts, and news reporters (i.e., business press) in constructing firm-specific disclosure measures that are quantitative and amenable to replication. We expect credibility and timeliness differences in the disclosures by source, which would translate into differential cost of capital effects. We find that when content analysis indicates favorable disclosures, the firm's risk, as proxied by the cost of capital, stock return volatility, and analyst forecast dispersion, declines significantly. In contrast, unfavorable disclosures are accompanied by significant increases in risk measures. Analysis of disclosures by source—corporations, analysts, and the business press—reveals that negative disclosures from business press sources result in increased cost of capital and return volatility, and favorable reports from business press reduce the cost of capital and return volatility.

Our examination of the cross-section of expected returns reveals economically and statistically significant compensation (about 6 to 9% per annum) for beta risk when betas are estimated from time-series regressions of annual portfolio returns on the annual return on the equal-weighted market index. The relation between book-to-market equity and returns is weaker than that in Fama and French (1992a). We conjecture that book-to-market results using COMPUSTAT data are affected by a selection bias and provide indirect evidence.