Identifying Accounting Conservatism in the Presence of Skewness

42 Pages Posted: 29 Mar 2018 Last revised: 6 Oct 2022

See all articles by Henry Jarva

Henry Jarva

Hanken School of Economics

Matthijs Lof

Aalto University

Date Written: October 5, 2022

Abstract

The asymmetric timeliness (AT) coefficient as a measure of accounting conservatism has been subject to much debate. We clarify the conditions under which the AT coefficient identifies accounting conservatism in the presence of skewness. Specifically, using an extensive simulation-based approach, we examine the joint impact of return skewness, earnings skewness, and return endogeneity. We show that skewness of returns and earnings distorts the AT coefficient as a measure of conservatism when returns are endogenous. While earnings skewness is a predicted consequence of conditional conservatism, return skewness is arguably unrelated to conservative reporting and cannot be tackled by simple skew reducing transformations or outlier-robust estimators. Empirically, we provide evidence that cross-sectional variation in the AT coefficient is correlated with cross-sectional variation in skewness.

Keywords: conditional conservatism; asymmetric timeliness; piecewise linear regression; skewness

JEL Classification: M41, C15

Suggested Citation

Jarva, Henry and Lof, Matthijs, Identifying Accounting Conservatism in the Presence of Skewness (October 5, 2022). Available at SSRN: https://ssrn.com/abstract=3151365 or http://dx.doi.org/10.2139/ssrn.3151365

Henry Jarva (Contact Author)

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Matthijs Lof

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

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