Accounting Conservatism and Information Shocks: Consequences of Index Membership

• Grant number: 24/08503-6
• Support Opportunities: Scholarships abroad - Research
• Start date: September 01, 2024
• End date: January 31, 2025
• Field of knowledge: Applied Social Sciences - Economics
• Principal Investigator: Francisco Henrique Figueiredo de Castro Junior
• Grantee: Francisco Henrique Figueiredo de Castro Junior
• Host Investigator: Kent D Daniel
• Host Institution: Escola de Economia de São Paulo (EESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Institution abroad: Columbia Business School, United States

Abstract

The objective of this research is to analyze the relationship between conservative financial statements and information asymmetry in the Brazilian market. The literature suggests that conservative reports can serve as a mechanism to mitigate investors' expropriation risk in contexts of high information asymmetry. To test this hypothesis, we will analyze how conservatism reacts to shocks in firms' information asymmetry, represented by their inclusion or exclusion from the Ibovespa market index. The Brazilian market provides a relevant environment to test for potential causality due to the specific quantitative rules that govern the inclusion and exclusion of firms in the Ibovespa. These rules allow for the exploration of how firms' behavior changes near the threshold determining index membership using a Regression Discontinuity Design (RDD) approach. This research will investigate whether firms included in the index exhibit significantly lower levels of conditional conservatism compared to firms with similar levels of liquidity that are not included in the index. We expect that inclusion in the index reduces firms' conditional conservatism, while exclusion increases it. These expected results align with the hypothesis that timely loss recognition follows changes in information asymmetry, highlighting its role as a governance mechanism. This research will contribute to understanding the effects of Ibovespa composition on the quality of financial reporting and governance mechanisms in the Brazilian market.