Abstract

http://ssrn.com/abstract=1492120
 
 

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Evidence of Conditional Conservatism: Fact or Artifact?


Panos N. Patatoukas


University of California, Berkeley - Haas School of Business

Jacob K. Thomas


Yale School of Management

October 5, 2009


Abstract:     
The differential timeliness measure proposed in Basu (1997), which estimates the fraction of observed bad news reported in contemporaneous earnings minus the corresponding fraction for good news, has been used widely to study conditional accounting conservatism. Timeliness is measured as the slope from a regression of earnings, scaled by lagged price, on returns. We find that differential timeliness estimates are biased by two empirical regularities related to lagged price, the deflator in the timeliness regressions: it is negatively related to a) the variance of returns, and b) the probability of a loss, and the magnitude of price-deflated losses. Even though these regularities are unrelated to conditional conservatism, their effects are substantial and pervasive. Also, prior findings regarding time-series and cross-sectional variation in differential timeliness are confounded by corresponding variation in these regularities.

Number of Pages in PDF File: 42

Keywords: conservatism, asymmetric timeliness, losses, scaling by share price

JEL Classification: M41, G10

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Date posted: October 25, 2009  

Suggested Citation

Patatoukas, Panos N. and Thomas, Jacob K., Evidence of Conditional Conservatism: Fact or Artifact? (October 5, 2009). Available at SSRN: http://ssrn.com/abstract=1492120 or http://dx.doi.org/10.2139/ssrn.1492120

Contact Information

Panos N. Patatoukas (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
HOME PAGE: http://sites.google.com/site/panossom/
Jacob Kandathil Thomas
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
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