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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

January 3, 2013

Chicago Booth Research Paper No. 09-16

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.

Number of Pages in PDF File: 36

Keywords: conditional conservatism, asymmetric timeliness, earnings

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

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Date posted: July 13, 2007 ; Last revised: February 19, 2013

Suggested Citation

Ball, Ray and Kothari, S.P. and Nikolaev , Valeri V., Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism (January 3, 2013). Chicago Booth Research Paper No. 09-16. Available at SSRN: http://ssrn.com/abstract=999710 or http://dx.doi.org/10.2139/ssrn.999710

Contact Information

Ray Ball (Contact Author)
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
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
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