Accounting Conservatism, Financial Reporting and Stock Returns

Research Question: One of the aims of this paper is to examine accounting conservatism using a robust set of data collected from the recent years to better understand how accounting conservatism affects the relations between stock returns and accounting variables. Motivation: Financial reporting is increasingly dependent on an in-depth understanding of the imperfections in the capital markets as well as the impact of the accounting standards on firm performance. Idea: The effect of accounting regulations on the firms’ reporting practices can be evaluated via a firm’s change in cash investments and its operating assets. Data: This study employs a robust set of data with different market to book ratios and corporate governance characteristics collected from Compustat North America Fundamentals Annual firm year observations for the time period of January 1998 to December 2015 fiscal years to better understand how accounting conservatism affects the relations between stock returns and accounting variables. Tools: Compared to the previous studies, any potential improvement in the research method is provided using a regression weight averaged over the years. Findings: There is an improvement in the explanatory power of the estimates of the coefficients on earnings levels and earnings changes when the variables associated with accounting conservatism are incorporated in the analysis. Contribution: Given the ample amount of research done in the international aspects of financial reporting, analyses of differences in results compared to the previous studies and future research opportunities will be provided.