Identifying Accounting Conservatism in the Presence of Skewness

41 Pages Posted: 29 Mar 2018 Last revised: 26 Jun 2020

See all articles by Henry Jarva

Henry Jarva

Aalto University - School of Business

Matthijs Lof

Aalto University

Date Written: February 22, 2020


We show analytically that the asymmetric timeliness (AT) coefficient in the Basu (1997) model is not a reliable measure of accounting conservatism in the presence of skewness in returns and/or earnings. Using an extensive simulation-based approach, we clarify the exact conditions under which asymmetry in the distribution of both returns and earnings adversely affects the AT coefficient. While earnings skewness is a predicted consequence of conditional conservatism, return skewness is arguably unrelated to conservative reporting. Return skewness therefore distorts the AT coefficient as a measure of conservatism, which cannot be tackled by simple skew reducing transformations. 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 (February 22, 2020). Available at SSRN: or

Henry Jarva (Contact Author)

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076

Matthijs Lof

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101


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