The conservatism principle and the asymmetric timeliness of earnings1**

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I interpret conservatism as resulting in earnings reflecting ‘bad news’ more quickly than ‘good news’. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms’ stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. ¢ 1997 Elsevier Science B.V. All rights reserved.

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    **

    This paper is based on my dissertation completed at the University of Rochester. 1 am grateful for the advice and encouragement of my committee, Ray Ball (Chairman), Ross Watts and S.P. Kothari. Mike Barclay, Andrew Christie, Michele Daley, Steve Lilien, Nell Pearson, Terry Shevlin (the discussant), Joe Weintrop, Jerry Zimmerman (the editor), and two anonymous referees have also contributed significantly to this paper, l also thank workshop participants at the University of Arizona, University of Buffalo, Baruch College, McGill University, New York University, the 1995 JAE Conference, the 1996 Conference on Financial Economics and Accounting, and especially, Ph.D. workshop participants at the Simon School for helpful comments. All errors are the author’s.

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