On the Conditional Conservatism Measure: A Robust Estimation Approach

31 Pages Posted: 16 Aug 2015 Last revised: 19 Nov 2017

See all articles by Seil Kim

Seil Kim

Baruch College, City University of New York

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

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Date Written: October 22, 2017

Abstract

Recent research, due to Patatoukas and Thomas (2011) and Ball et al. (2013), focuses on Basu’s (1997) conditional conservatism measure and the existence of a denominator effect — whether the difference between the earnings-return coefficients of bad and good news firms (“the Basu coefficient”) is only due to the beginning-of-year price deflator. We address this issue head-on by applying the Theil-Sen (TS) estimation method, which obtains the same coefficient estimate regardless of the chosen deflator and is robust to outliers. Results show the following: (i) the Basu coefficient remains positive using TS; (ii) the Basu coefficient using TS are similar to those using OLS without scaling but much smaller than what scaled OLS show; (iii) the scaled OLS estimates appear to be influenced by a few outliers; and (iv) OLS estimates are more volatile due to estimation error. In sum, the denominator effect does not overturn Basu’s hypothesis but the magnitude and variation of the Basu coefficient is much smaller than what traditional results show.

Suggested Citation

Kim, Seil and Ohlson, James A., On the Conditional Conservatism Measure: A Robust Estimation Approach (October 22, 2017). Available at SSRN: https://ssrn.com/abstract=2644423 or http://dx.doi.org/10.2139/ssrn.2644423

Seil Kim (Contact Author)

Baruch College, City University of New York ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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