Reporting Conservatism, Loss Reversals, and Earnings-based Valuation
We study the determinants of losses and their increased frequency over time to understand their implications for the use of financial statements in valuation. We find the properties of losses change between 1971-2000 both in terms of th...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
2003
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/1855 |
| _version_ | 1826190760815362048 |
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| author | Joos, Peter R. Plesko, George A. |
| author_facet | Joos, Peter R. Plesko, George A. |
| author_sort | Joos, Peter R. |
| collection | MIT |
| description | We study the determinants of losses and their increased frequency over time to
understand their implications for the use of financial statements in valuation. We find
the properties of losses change between 1971-2000 both in terms of the cash flow
and accruals components. Departing from prior research, we explicitly model the
estimated likelihood of loss reversal. We find firms estimated to be least likely to
reverse have unusually large negative cash flows and accruals, comprised of relatively
large amounts of R&D expenditures and Special Items. We also find the market
assesses both the effect of reporting conservatism and the attractiveness of abandoning
the investment in the firm when it prices losses. We interpret this as evidence that the
probability of loss reversal summarizes financial information useful to investors and
serves as a proxy for the earning power of assets when the firm reports a los |
| first_indexed | 2024-09-23T08:44:58Z |
| format | Working Paper |
| id | mit-1721.1/1855 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T08:44:58Z |
| publishDate | 2003 |
| record_format | dspace |
| spelling | mit-1721.1/18552019-04-10T07:18:35Z Reporting Conservatism, Loss Reversals, and Earnings-based Valuation Joos, Peter R. Plesko, George A. Earnings Losses Conservatism Cash Flows Accruals We study the determinants of losses and their increased frequency over time to understand their implications for the use of financial statements in valuation. We find the properties of losses change between 1971-2000 both in terms of the cash flow and accruals components. Departing from prior research, we explicitly model the estimated likelihood of loss reversal. We find firms estimated to be least likely to reverse have unusually large negative cash flows and accruals, comprised of relatively large amounts of R&D expenditures and Special Items. We also find the market assesses both the effect of reporting conservatism and the attractiveness of abandoning the investment in the firm when it prices losses. We interpret this as evidence that the probability of loss reversal summarizes financial information useful to investors and serves as a proxy for the earning power of assets when the firm reports a los 2003-04-14T20:25:32Z 2003-04-14T20:25:32Z 2003-04-14T20:25:32Z Working Paper http://hdl.handle.net/1721.1/1855 en_US MIT Sloan School of Management Working Paper;4262-02 133217 bytes application/pdf application/pdf |
| spellingShingle | Earnings Losses Conservatism Cash Flows Accruals Joos, Peter R. Plesko, George A. Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title | Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title_full | Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title_fullStr | Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title_full_unstemmed | Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title_short | Reporting Conservatism, Loss Reversals, and Earnings-based Valuation |
| title_sort | reporting conservatism loss reversals and earnings based valuation |
| topic | Earnings Losses Conservatism Cash Flows Accruals |
| url | http://hdl.handle.net/1721.1/1855 |
| work_keys_str_mv | AT joospeterr reportingconservatismlossreversalsandearningsbasedvaluation AT pleskogeorgea reportingconservatismlossreversalsandearningsbasedvaluation |