Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
University of Chicago
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Valeri V. Nikolaev
University of Chicago - Booth School of Business
August 1, 2013
Journal of Accounting Research, Forthcoming
Chicago Booth Research Paper No. 13-65
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm’s operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which “unbooked” information (such as revised expectations about rents and growth options) is independent of other information, and discuss the conditions under which a proxy for this characteristic is the market-to-book ratio. We also conclude that much criticism of the Basu regression misconstrues researchers’ objectives.
Number of Pages in PDF File: 37
Keywords: Conditional conservatism, Timely loss recognition, Basu model, Returns-earnings regressions, Earning respnse coefficients, Market-to-book ratioAccepted Paper Series
Date posted: August 2, 2013
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