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http://ssrn.com/abstract=2360189
 
 

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Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism


Ray Ball


University of Chicago

S.P. Kothari


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Valeri V. Nikolaev


University of Chicago - Booth School of Business

November 26, 2013

Journal of Accounting Research, Vol. 51, No. 5, 2013

Abstract:     
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.

Keywords: conditional conservatism, asymmetric timeliness, earnings

Accepted Paper Series





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Date posted: November 28, 2013  

Suggested Citation

Ball, Ray and Kothari, S.P. and Nikolaev , Valeri V., Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism (November 26, 2013). Journal of Accounting Research, Vol. 51, No. 5, 2013. Available at SSRN: http://ssrn.com/abstract=2360189

Contact Information

Ray Ball
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-5941 (Phone)
773-702-0458 (Fax)
S.P. Kothari
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)
Valeri V. Nikolaev (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
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