More Evidence of Bias in the Differential Timeliness Measure of Conditional Conservatism
46 Pages Posted: 26 May 2010 Last revised: 11 Apr 2014
Date Written: May 20, 2010
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: Suggested Citation