The Conservatism Principle And The Asymmetric Timeliness Of Recognizing Events

Accounting conservatism anticipates no profits, but anticipates all losses (Bliss,1924). As the standard of recognizing profits is higher than the sta ndard of recognizing losses, losses are always recognized earlier than profits in reported earnings. Basu (1997) tested this asymmetric timeliness hypothe sis by regressing annual earnings on contemporaneous returns using positive (negative) annual stock returns as a proxy for good (bad) news. He found that the contemporaneous sensitivity of earnings to negative returns is signifi cantly higher than that of earnings to positive returns.Basu (1997) research is very influential and had made accounting conse rvatism a popular thesis in accounting research. Just as other researches, the re are some drawbacks in his research which other scholars have found out and revised.This paper based on the hypothesis that managers will be more conserv ative in recognizing negative events that are material in magnitude, because the likelihood of litigation, penalty from government, departure of sharehol ders, to pay off the debts in advance and the potential costs of these risks are higher for material misstatements or omissions. The thesis of this paper is to find out the relation between the conservatism principle and the asym metric timeliness of recognizing events by accounting earnings and shock re turn method, aggregate accounting earnings and aggregate shock return met hod, used extreme three-day returns and quarter accounting earnings, selecte d from2008to2013, Shanghai and Shenzhen’s A shares data as the study sample. After the implementation of the new accounting standards which ke eps on-going convergence with International Financial Reporting Standard (I FRS).The conservatism of accounting earnings reduced, while fair value had been more widely used. There are few researches about the impact of the new accounting standards on the conservatism which still did not form a un ified opinion.The first part will provide the background, the significance, the method s and the arrangement of the research, and the main innovation points of th is paper. The second part summarizes the conclusion and measuring methods of accounting conservatism. The third part lists the factors that influence a ccounting conservatism. The fourth part is the design of this research, conta ins hypothesis, model, selected sample. The fifth part is the empirical analys is, and determine whether our empirical result in accordance with our hypot hesis or not. The sixth part is the conclusion of our research.The contributions of this research as follows:(1) The innovation of the research fieldAfter the implementation of the new accounting standards, the conservat ism of accounting earnings reduced, while fair value has been more widely used. Accounting conservatism play a vital role in every accounting innovati on which provide us a good opportunity to study the implementary result of the new accounting standards from the view of conservatism. There are fe w researches about the impact of the new accounting standards on the cons ervatism which still did not form a unified opinion and is still worthy of in tensively studying. One popular thesis in accounting conservatism research fi eld is the asymmetric timeliness of it which is just the main thesis of this paper.(2) The innovation of the study methodFirst of all, this paper based on an event study approach which is a m ore and more popular method used in the top financial and accounting jour nals. However, the method has been rarely used in domestic accounting con servatism research field, so it is innovational that this paper used the metho d to do the research.Secondly, this paper use short return window to do the research which enhances our ability to isolate the economic impact of the event. Using extr eme three-day return as dependent variable, using quarterly earnings as inde pendent variable is the shortest window in accounting conservatism research field at present.Last but not the least, this paper based on the study of the domestic a nd foreign scholars and selected several widely used method to do the resea rch. Our models have not only tested whether the previous conclusion accur ate, rigorous or not, but also provide some suggestions which is suitable for the study of accounting conservatism in the future. Our study have make a n effort for accounting conservatism researches to be an architectonical one.(3) Updated research dataThe sample of this research contains the A-share listed company dated from2008to2013. The data is updated to be the newest at present, and is after the implementation of the new accounting standard at2007. It is an advantage to use our data to study the implementary result of the new acco unting standards from an accounting conservatism perspective. The data whi ch use the shortest window in accounting conservatism research field at pre sent is effective and comprehensive enough to get the conclusions which are more accurate, representative and persuasive.