More Evidence of Bias in the Differential Timeliness Measure of Conditional Conservatism

46 Pages Posted: 26 May 2010 Last revised: 11 Apr 2014

See all articles by Panos N. Patatoukas

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Jacob K. Thomas

Yale School of Management

Date Written: May 20, 2010

Abstract

Despite the conceptual appeal and popularity of the differential timeliness (DT) measure of conditional conservatism proposed in Basu (1997), Dietrich et al. (2007) and Givoly et al. (2007) have identified considerable biases associated with that measure. We renew their call to avoid using the DT measure because it is affected unexpectedly by two empirical regularities. Namely, scale is negatively related to (1) deflated mean earnings and (2) variance of stock returns. Even though these regularities are unrelated to conditional conservatism, their joint effect is substantial and pervasive. More importantly, prior findings regarding time-series and cross-sectional variation in differential timeliness are confounded by corresponding variation in these regularities.

Keywords: Conservatism, Differential Timeliness, Losses, Scaling by Share Price

JEL Classification: M40

Suggested Citation

Patatoukas, Panos N. and Thomas, Jacob Kandathil, More Evidence of Bias in the Differential Timeliness Measure of Conditional Conservatism (May 20, 2010). The Accounting Review, September 2011. Available at SSRN: https://ssrn.com/abstract=1616134

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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