Asymmetric Timeliness and Delayed Recognition of Bad News

This article examines whether the asymmetric timeliness measure captures delayed recognition of bad news and in which manner this delayed recognition occurs. I find that negative earnings changes of firms with high asymmetric timeliness have significant predictive power for future earnings changes of low-asymmetric-timeliness firms in the same industry. In contrast, the negative earnings changes of firms with low asymmetric timeliness do not have predictive power for future earnings changes of high-asymmetric-timeliness firms in the same industry. Moreover, neither type of firm has predictive power for the other group when earnings changes are positive. This result suggests that high-asymmetric-timeliness firms recognize the effects of a common negative shock before low-asymmetric-timeliness firms. Further, low-asymmetric-timeliness firms have more frequent and smaller negative earnings changes, suggesting that the eventual recognition of negative news “trickles out” as opposed to being recognized in an “earnings bath.”