The Confounding Effect of Cost Stickiness on Conservatism Estimates

41 Pages Posted: 17 Aug 2012 Last revised: 8 Mar 2016

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Janice Chen

University of the Pacific (UOP)

Date Written: June 24, 2015

Abstract

Sales decreases affect earnings more than sales increases because of cost stickiness. We hypothesize that this correlated omitted variable constitutes a confounding effect in standard asymmetric timeliness models. Controlling for a piecewise linear effect of sales changes in these models decreases the measured asymmetric timeliness significantly and changes inferences about the average level of conservatism and the extent of cross-sectional variation in conservatism. Validation tests confirm that the asymmetry for sales changes is consistent with sticky costs and is distinct from conditional conservatism. Future empirical research on conditional conservatism should recognize the potential confounding effect of sticky costs.

Keywords: timely loss recognition, omitted variable bias, over-investment

JEL Classification: D21, D23, M40, M41, M46

Suggested Citation

Banker, Rajiv D. and Basu, Sudipta and Byzalov, Dmitri and Chen, Janice, The Confounding Effect of Cost Stickiness on Conservatism Estimates (June 24, 2015). Journal of Accounting & Economics (JAE), Forthcoming; Fox School of Business Research Paper No. 16-007. Available at SSRN: https://ssrn.com/abstract=2130897 or http://dx.doi.org/10.2139/ssrn.2130897

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Dmitri Byzalov (Contact Author)

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

Janice Chen

University of the Pacific (UOP) ( email )

3601 Pacific Avenue
Stockton, CA 95211
United States

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