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Placebo Tests of Conditional Conservatism

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Jacob K. Thomas

Yale School of Management

June 3, 2015

The Accounting Review, March 2016

Basu (1997) proposes a measure of financial reporting conservatism based on asymmetry in the conditional earnings/returns relation. Patatoukas and Thomas (2011) show upward bias in this measure, because a placebo — lagged earnings — also exhibits similar asymmetry. Ball, Kothari, and Nikolaev (2013a) and Collins, Hribar, and Tian (2014) propose alternative explanations for the bias and offer revised measures to overcome the bias. We find, however, that both revised measures remain substantially upward biased. In particular, a placebo based on lagged share price mimics time-series and cross-sectional variation observed for the revised measures. More generally, we find biases in the asymmetric timeliness specification because earnings, accruals, and other measures of performance are often related to second and higher moments of the distribution of returns. In addition to suggesting the asymmetric timeliness specification be used with caution, our study illustrates the useful role placebos can play in archival studies.

Number of Pages in PDF File: 48

Keywords: Conditional conservatism; asymmetric timeliness; differential timeliness; placebo tests

JEL Classification: M41

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Date posted: April 23, 2015 ; Last revised: June 27, 2016

Suggested Citation

Patatoukas, Panos N. and Thomas, Jacob K., Placebo Tests of Conditional Conservatism (June 3, 2015). The Accounting Review, March 2016. Available at SSRN: https://ssrn.com/abstract=2283689 or http://dx.doi.org/10.2139/ssrn.2283689

Contact Information

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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