Accounting for good news and accounting for bad news: Some empirical evidence from the Czech Republic

Irena Jindrichovska () and Stuart McLeay

European Accounting Review, 2005, vol. 14, issue 3, 635-655

Abstract: This paper is motivated by the links that continue to be forged between security pricing and accounting, building on recent findings that firms tend to be asymmetrically conservative in the timeliness of earnings recognition. The evidence is that firms in the European Union tend to recognise unrealised losses more quickly in their earnings than unrealised gains (Giner and Rees, 2001; Raonic et al., forthcoming), and there is evidence of even greater accounting conservatism in the USA (Basu, 1997; Ball et al., 2000; Givoly and Hayn, 2000). This paper investigates whether the Czech market exhibits conformity with the behaviour that has been documented elsewhere by examining the earnings/returns relationship, focusing to begin with on the impact of losses on earnings response coefficients and then considering the asymmetric timeliness of income recognition in the Czech market. The findings indicate that the Czech market is similar to more developed markets, at least in one respect: there is statistically significant evidence of different market effects of profits and losses, in that profits are more persistent than losses. However, contrary to the findings in more developed markets, there is no statistically significant evidence of earnings conservatism in the Czech market. These results are most probably due to the continuing influence of restrictive tax regulations that mitigate any tendency towards conservatism, as well as the transitional nature of the economy. A further reason is likely to be that the regulatory environment in the Czech Republic is close to the kind of stakeholder corporatism that is described by Ball et al. (2000), who show that conservatism tends to be less pronounced in such regimes where there are fewer managerial incentives to bias current earnings. In conclusion, if changes in market prices signal good news and bad news about future risky outcomes, there is no evidence of asymmetry in the Czech market in accounting for such risks.

Date: 2005
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/0963818042000336764 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:euract:v:14:y:2005:i:3:p:635-655

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REAR20

DOI: 10.1080/0963818042000336764

Access Statistics for this article

European Accounting Review is currently edited by Laurence van Lent

More articles in European Accounting Review from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().