The Differential Effects of Good News and Bad News Earnings Timeliness on the Cost of Equity Capital

• In Event: Valuation consequences of reporting quality
  In Paper Session: Valuation Consequences of Reporting Quality

Abstract

This study jointly examines the differential effects of good and bad news earnings timeliness on the cost of equity capital. Given prior evidence that high quality information is associated with lower cost of equity capital, our examination sheds light on the effects of conservatism (which emphasizes bad news earnings timeliness) on the usefulness of earnings for equity valuation. We find that bad news earnings timeliness is negatively associated with future returns, suggesting that bad news timeliness is associated with lower cost of capital. Thus, equity investors appear to perceive bad news timeliness as enhancing earnings transparency. By contrast, good news timeliness is positively associated with future returns in most empirical specifications. Thus, equity investors appear not to perceive good news timeliness as enhancing transparency and, in fact, there is some evidence that they perceive good news timeliness as undermining earnings transparency. Taken collectively, our results indicate that shareholders believe conditional conservatism enhances earnings transparency.

Authors

• Michael Kimbrough, University of Maryland College Park

• Hanna Lee, University of Maryland College Park

• Sorah Park, Ewha School of Business