Re-examining the relationship between PIN and timely loss recognition

Abstract

We re-examine the positive relationship between the probability of information-based trading (PIN) measure and timely loss recognition, documented by LaFond and Watts (2008). This relationship has been interpreted as evidence that timely loss recognition plays an information role for equity investors in addition to the debt-contracting role widely suggested by the accounting literature. However, we show that this relationship diminishes after we control for lender–shareholder conflict, for which we use as a proxy the price-change asymmetry (PCA) measure suggested by Easton et al. (2011). This finding implies that timely loss recognition still caters mainly to the demands of lenders rather than equity investors. Our study contributes new evidence to the ongoing debate on the underlying cause of timely loss recognition, which is a fundamental issue in accounting literature.

Keywords:

• timely loss recognition
• information asymmetry
• lender–shareholder conflict

JELClassification:

• M41