Asymmetry in Cash Flows and Accounting Conservatism

39 Pages Posted: 19 Sep 2008 Last revised: 4 May 2010

See all articles by Henry Jarva

Henry Jarva

Aalto University - School of Business

Date Written: May 4, 2010

Abstract

In this paper, I present evidence that the asymmetry in cash flows biases standard measures of conditional conservatism. First, the magnitude of the asymmetric timeliness coefficient decreases substantially (by 28–58%) when the dependent variable is accruals in the Basu (1997) model. Second, the results show that both accruals and cash flows are less persistent for firms with negative returns. This result suggests that the Basu (1997) asymmetric earnings change specification cannot distinguish whether the lower persistence of earnings is due to accounting conservatism or a result of real activities. Third, I show that extant non-price proxies for economic loss are very poor at identifying the sign of economic income. Finally, I replicate a recent study and demonstrate that inferences change when using accruals as the dependent variable and after controlling for variables that are the determinants of nondiscretionary accruals.

Keywords: Accruals, Asymmetric timeliness, Conditional conservatism, Sarbanes-Oxley Act

JEL Classification: M41

Suggested Citation

Jarva, Henry, Asymmetry in Cash Flows and Accounting Conservatism (May 4, 2010). Available at SSRN: https://ssrn.com/abstract=1270122 or http://dx.doi.org/10.2139/ssrn.1270122

Henry Jarva (Contact Author)

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

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