The accounting conservatism and information asymmetry: implications for the accrual anomaly

Abstract

This thesis identifies environmental conditions in which the accrual anomaly is likely to occur. Based on earnings fixation explanations, I find that accounting conservatism and information asymmetry significantly affect investors’ perceptions of accruals, leading to security mispricing. Specifically, results in Study 1 suggest that investors are likely to overestimate the persistence of accruals when more conservative accounting is applied to reported earnings. Results in Study 2 show that investors’ mispricing on the accrual component of earnings is more severe regarding stocks of firms with high levels of information asymmetry. Additional market tests on both studies suggest that the positive relationship between accounting conservatism (as well as information asymmetry) and mispricing on accruals is more likely to be observed when accruals are negative.