Research Insights: Accounting conservatism and qualitative disclosures

It is well established that accounting conservatism is characterized by a lower threshold for reporting bad news than good news. Less clear is whether such conservatism affects a firm’s incentives for providing qualitative disclosures.

To study this relationship, Ashok Robin, Ph.D., professor of finance and accounting in Saunders College, and Kean Wu, Ph.D., associate professor of finance and accounting, employed the setting of the COVID-19 pandemic, which caused a surge in stock return volatility and generated an enormous demand for corporate disclosures. Their working paper, co-authored with others outside RIT, “Accounting Conservatism and Qualitative Disclosures: Evidence from the COVID-19 Pandemic,” explores the conservatism/disclosure dynamic amid the uncertainty of the pandemic. The authors conducted a textual analysis of COVID-related qualitative disclosures in 3750 quarterly reports (10-Qs) filed between March 12 and December 31, 2020, including modern computing methods such as topic modeling.

A key finding: “firms less committed to conservative reporting provide a greater amount of qualitative COVID disclosures in 10-Qs.” Further, they found that short-term stock volatility is “augmented by qualitative disclosures while long-term volatility is mitigated by conservatism.” In sum, there are benefits to early as opposed to later disclosure of bad news.