Do Conditional and Unconditional Conservatism Impact Earnings Quality and Stock Prices in Egypt?

Abstract

The purpose of this paper is to examine the impact of conditional and unconditional conservatism on earnings' quality and stock prices in Egyptian context and provide further insights on the effects of earnings' quality on stock prices. This paper follows the asymmetric timeliness of earnings measure of Basu (1997) with further extension to measure the effect of conditional and unconditional on the quality of earnings and stock prices. This study employs cross sectional data analysis and multiple regression using data available for a sample of the largest 30 Egyptian listed firms during the period of 2005 to 2009. The results suggest that (i) conditional conservatism negatively affects both earnings quality and stock prices of Egyptian firms, and (ii) unconditional conservatism does not affect earnings quality but has a negative association with stock prices of Egyptian firms. The findings of this study would help Egyptian accounting standards setters to recommend accounting choices and policies that lead to high quality of earnings and provide financial reports that rationalize investors' decisions. This study is the first to test the impact of both conditional and unconditional conservatism on earnings' quality and stock prices in Egyptian setting.

Keywords: Conservatism, conditional conservatism, unconditional conservatism, Earnings' quality, stock prices, Basu model, listed firms, Egyptian Stock Market, Egypt