The Confounding Effect of Cost Stickiness in Conservatism Research

44 Pages Posted: 18 Aug 2014

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: August 17, 2014

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. Adding sales change direction to the Basu (1997) and Ball et al. (2013b) models decreases measured conservatism significantly and has a large impact on the relative ranking of industry-level conservatism estimates and on inferences about drivers of conservatism. Future empirical research on conditional conservatism should control for the potential confounding effect of sticky costs.

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

JEL Classification: D22, D24, M41

Suggested Citation

Banker, Rajiv D. and Basu, Sudipta and Byzalov, Dmitri and Chen, Janice, The Confounding Effect of Cost Stickiness in Conservatism Research (August 17, 2014). AAA 2015 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2482025 or http://dx.doi.org/10.2139/ssrn.2482025

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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