Skewness of Earnings and the Believability Hypothesis: How Does The Financial Market Discount Accounting Earnings Disclosures?

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Abstract
When firms attempt to manage their earnings disclosures by presenting evidence selectively, sophisticated inference on the part of financial market participants entails a positive association between the market to book ratio of a firm and the skewness of the distribution of its announced earnings. In this paper, we put this hypothesis to the test, and confirm its main predictions. Our regressions reveal a prominent and robust role for skewness in the empirical relationships surrounding earnings disclosures, and suggest that in setting security prices the financial market's skepticism about how much private information managers have dominates the effect of perceived bankruptcy risk.

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