Asymmetrically Timely Response of Earnings to Industry Volume Shocks

Tseng, Ayung
Lin, Haizhen
Ryan, Stephen
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We provide evidence that researchers examining the timelier response of earnings to bad news than to good news can generate more interpretable results by using industry volume shocks rather than or in addition to returns as the proxy for news. This use provides two main benefits. First, it substantially eliminates known biases in estimates of asymmetric timeliness resulting from the use of returns as the news proxy. Industry return shocks: are removed from firm characteristics (return volatility and loss frequency) known to be associated with these biases; are largely exogenous to individual firms; and drive earnings over the relatively short term, mitigating concerns about unrecognized economic assets immune to conditional conservatism. Second, this use helps researchers distinguish three sources of asymmetric timeliness documented in prior research: conditional conservatism, cost stickiness, and curtailment put options. It is more feasible to identify which costs that are sticky and which investments can be curtailed for individual industries than for the universe of firms. Industry volume shocks interact closely with proxies for resource adjustment costs that determine whether costs are sticky or firms instead curtail the deployment of resources when demand turns down.
asymmetric timeliness, conditional conservatism, cost stickiness, curtailment, industry
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