An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Inder Khurana
University of Missouri

Xiumin Martin
University of Missouri

Raynolde Pereira
University of Missouri

K. K. Raman
University of North Texas

Abstract: Recent research contends and finds that earnings disappointments during good times (periods when the economy is in a relatively strong state) elicit severe shocks to the firm’s stock price. In this paper, we investigate whether the adverse investor response to earnings disappointments during good times creates an incentive for firms to defer the accounting recognition of economic losses during such times. Our analysis covers a 40 year period (1964-2003), employs alternative operationalizations of economic states, and uses three measures of timely recognition of economic losses. Our findings support the hypothesis that timely accounting loss recognition is lower during periods when economic conditions are relatively strong. By contrast, we fail to observe similar relations when we substitute cash flow from operations for earnings as our research metric, implying that our findings of a decline in timely loss recognition during good times reflect accounting (rather than “real”) effe

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