This paper analyzes the relationship between revision to returns and earning news, and the relationship between revision to returns and prior adjustments, based on Vuolteenaho model, asymmetric properties of conservative accounting and the existence of non-accounting sources of information. Based on the model, we construct a conservatism ratio (CR), defined as the ratio of the current earnings shock to earnings news. The CR measures the proportion of total shock to expected current and future earnings recognized in the current year earnings.
The sample includes 106 firms listed in Tehran Stock Exchange in the period of 1383 to 1388. The results show that there is a nonlinear relationship between revision to return and earning news, but there is not any relationship between revision to returns and prior adjustments. Also, consistent with conservative literature, when there is a negative shock to the current and future expected cash flows, a greater proportion of the total shock is incorporated into the current period earnings, compared with times with no such a positive shock.
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