Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism

Journal of Accounting Research, Forthcoming

Chicago Booth Research Paper No. 13-65

37 Pages Posted: 2 Aug 2013  

Ray Ball

University of Chicago - Accounting

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Valeri V. Nikolaev

University of Chicago Booth School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2013

Abstract

A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm’s operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which “unbooked” information (such as revised expectations about rents and growth options) is independent of other information, and discuss the conditions under which a proxy for this characteristic is the market-to-book ratio. We also conclude that much criticism of the Basu regression misconstrues researchers’ objectives.

Keywords: Conditional conservatism, Timely loss recognition, Basu model, Returns-earnings regressions, Earning respnse coefficients, Market-to-book ratio

Suggested Citation

Ball, Ray and Kothari, S.P. and Nikolaev , Valeri V., Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism (August 1, 2013). Journal of Accounting Research, Forthcoming; Chicago Booth Research Paper No. 13-65. Available at SSRN: https://ssrn.com/abstract=2304913

Ray Ball

University of Chicago - Accounting ( email )

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Valeri V. Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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