Placebo Tests of Conditional Conservatism
Panos N. Patatoukas
University of California, Berkeley - Haas School of Business
Jacob K. Thomas
Yale School of Management
June 3, 2015
The Accounting Review, March 2016
Basu (1997) proposes a measure of financial reporting conservatism based on asymmetry in the conditional earnings/returns relation. Patatoukas and Thomas (2011) show upward bias in this measure, because a placebo — lagged earnings — also exhibits similar asymmetry. Ball, Kothari, and Nikolaev (2013a) and Collins, Hribar, and Tian (2014) propose alternative explanations for the bias and offer revised measures to overcome the bias. We find, however, that both revised measures remain substantially upward biased. In particular, a placebo based on lagged share price mimics time-series and cross-sectional variation observed for the revised measures. More generally, we find biases in the asymmetric timeliness specification because earnings, accruals, and other measures of performance are often related to second and higher moments of the distribution of returns. In addition to suggesting the asymmetric timeliness specification be used with caution, our study illustrates the useful role placebos can play in archival studies.
Number of Pages in PDF File: 48
Keywords: Conditional conservatism; asymmetric timeliness; differential timeliness; placebo tests
JEL Classification: M41
Date posted: April 23, 2015 ; Last revised: June 27, 2016
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