Investigating the Relationship between Accounting Conservatism and Earning Response Coefficient in firms Listed in Tehran Stock Exchange

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Abstract

This paper investigates the relationship between accounting conservatism and earning response coefficient. Conservatism leads to a gradual recognition of profits. In other words, recognition of good news about earnings in a relevant period does not entirely occurr. The market reaction will lead to unexpected changes in earnings. Stock price changes, due to unexpected changes, are shown by earning response coefficient. Thus, by applying conservatism, the increase occurring in profit in each period will be lowered and take a continuous mode. In this paper, two measures of conservatism, Givoly and Hayn (2000) and Khan and Watts (2008), have been used. The results indicate positive earnings response coefficients. That is, the market reacts to the unexpected earnings, but with conservatism, the earnings response coefficients will be declined. Based on the research findings, there is a negative relationship between the two criteria of conservatism and earnings response coefficients and this relationship is statistically significant.

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Journal of Iranian Accounting Review
Volume 1, Issue 4 - Serial Number 4
December 2014
Pages 61-80

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