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Evidence of Conditional Conservatism: Fact or Artifact?

42 Pages Posted: 25 Oct 2009  

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Jacob K. Thomas

Yale School of Management

Date Written: October 5, 2009

Abstract

The differential timeliness measure proposed in Basu (1997), which estimates the fraction of observed bad news reported in contemporaneous earnings minus the corresponding fraction for good news, has been used widely to study conditional accounting conservatism. Timeliness is measured as the slope from a regression of earnings, scaled by lagged price, on returns. We find that differential timeliness estimates are biased by two empirical regularities related to lagged price, the deflator in the timeliness regressions: it is negatively related to a) the variance of returns, and b) the probability of a loss, and the magnitude of price-deflated losses. Even though these regularities are unrelated to conditional conservatism, their effects are substantial and pervasive. Also, prior findings regarding time-series and cross-sectional variation in differential timeliness are confounded by corresponding variation in these regularities.

Keywords: conservatism, asymmetric timeliness, losses, scaling by share price

JEL Classification: M41, G10

Suggested Citation

Patatoukas, Panos N. and Thomas, Jacob K., Evidence of Conditional Conservatism: Fact or Artifact? (October 5, 2009). Available at SSRN: https://ssrn.com/abstract=1492120 or http://dx.doi.org/10.2139/ssrn.1492120

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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