Revisiting Asymmetric Timeliness Estimates of Conditional Conservatism
Panos N. Patatoukas
University of California, Berkeley - Haas School of Business
Jacob K. Thomas
Yale School of Management
December 2, 2014
Basu (1997) proposes a measure of financial reporting conservatism based on asymmetry in the conditional earnings/returns relation. Patatoukas and Thomas (2011) show bias in this measure, because lagged earnings also exhibits similar asymmetry. Ball, Kothari, and Nikolaev (2013b), suggest that this bias is due to asymmetry between the expected components of earnings and returns, and propose a revised measure based on the unexpected components. Collins, Hribar, and Tian (2014) suggest that the bias arises because of asymmetry in the cash flow component of earnings, and propose a revised measure based on the accrual component. Not only does our evidence contradict these explanations for lagged earnings asymmetry, it suggests substantial bias in both revised measures, resulting in unreliable inferences about aggregate levels of, as well as time-series and cross-sectional variation in, conditional conservatism. More generally, our findings suggest that the asymmetric timeliness specification be used with caution.
Number of Pages in PDF File: 50
Keywords: Conditional conservatism; asymmetric timeliness; placebo tests; sample truncation bias
JEL Classification: M41
Date posted: April 23, 2015
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