The Role of Accounting Conservatism in Asymmetric Market Valuation of Nonrecurring Items

This research investigates the impact of accounting conservatism on the stock market’s valuation of nonrecurring gains and losses. The sample is comprised of 126 publicly traded firms listed in Tehran Stock Exchange (TSE) during 1386-1392. The nonrecurring gains and losses, also known as special items, have asymmetric market valuation multiples, which are proxied by the earnings response coefficient (ERC) in this research. The results show that: (1). an asymmetry exists in the valuation of nonrecurring gains and losses; and (2) the asymmetry can be explained by the idea of accounting conservatism, which is the tendency that firms report economic losses on a timelier basis than economic gains. The above findings show that nonrecurring losses have a higher earnings response coefficient than nonrecurring gains, due to the fact that nonrecurring losses (non-operational losses) are impounded in earnings much quicker than the gains (non-operational gains). Furthermore, as the level of conservatism increases within a firm, this asymmetry of market valuation becomes larger, signifying that the information content of negative nonrecurring items increases at a rate greater than that of positive nonrecurring items.