Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism

Abstract:     
Despite its popularity, the asymmetric timeliness coefficient has been challenged as a valid measure of conditional conservatism. We propose a model in which accounting income contemporaneously incorporates one component of price revision, incorporates another with a lag unless below a threshold (e.g., losses), invariably incorporates another with a lag, and adds uncorrelated “noise.” We demonstrate validity in this framework. We derive a negative relation between asymmetric timeliness coefficients and the proportion of price changes associated with growth option expectation revisions (proxied by market-to-book), due to lagged recognition. We conclude much criticism of the coefficient misconstrues research objectives.

Keywords: conditional conservatism, asymmetric timeliness, earnings

JEL Classifications: M40, M41, M44, G12, C20

Working Paper Series