Revisiting Conditional Conservatism

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Jacob K. Thomas

Yale School of Management

April 9, 2014

We incorporate revisions in expected future earnings to better represent concepts underlying the Basu (1997) discussion of conservatism and to disaggregate Basu’s asymmetric timeliness (AT) coefficient into two components that reflect conservatism by capturing asymmetry between bad and good news relating to: (i) the variance of unexpected earnings, and (ii) the covariance between unexpected earnings and revisions in expected future earnings and discount rates. We find bias in the AT measure as well as its two components, because they comove strongly with placebos that are unrelated to conservatism. Because this bias reflects asymmetries in the conditional distributions of stock prices and returns, future research should deemphasize specifications affected by such asymmetries. We also investigate a debate regarding the source of upward bias that arises when the AT measure is implemented using observed rather than unexpected earnings and returns. Our results support Patatoukas and Thomas (2011) but contradict Ball et al. (2013b).

Number of Pages in PDF File: 49

Keywords: Conditional conservatism, asymmetric timeliness, revisions in expected future earnings, placebo tests

JEL Classification: M41

working papers series

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Date posted: June 23, 2013 ; Last revised: April 12, 2014

Suggested Citation

Patatoukas, Panos N. and Thomas, Jacob K., Revisiting Conditional Conservatism (April 9, 2014). Available at SSRN: http://ssrn.com/abstract=2283689 or http://dx.doi.org/10.2139/ssrn.2283689

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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