Understanding How the Effects of Conditional Conservatism Measurement Bias Vary with the Research Context

39 Pages Posted: 10 Jul 2019

See all articles by Mostafa Harakeh

Mostafa Harakeh

Lebanese American University

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: July 8, 2019

Abstract

While the asymmetric timeliness (AT) measure of Basu (1997) underpins a large body of empirical research on conditional conservatism (CC), prior studies have demonstrated that it is biased and could lead to Type 1 error. To assess how this bias could affect inferences from prior literature, we re-examine previous CC studies that apply the AT measure, and we compare the outcomes with those based on the asymmetric conditional variance (ACV) measure of Dutta & Patatoukas (2017) confirmed to be less influenced by similar bias. We draw two primary conclusions. First, both measures yield similar inferences in interrupted time-series settings that examine the impact of exogenous accounting policy changes on CC. Second, the inferences drawn from the AT measure are not supported by the ACV measure in seminal studies that model the determinants of CC in cross-sectional settings. In addition, we find that the conflicting results between the AT and ACV measures in the cross-sectional settings disappear when the AT measure is allowed to vary across firms. Our findings have implications for both past and future empirical studies of CC.

Keywords: conditional conservatism, asymmetric timeliness, measurement bias, Type 1 error

Suggested Citation

Harakeh, Mostafa and Lee, Edward and Walker, Martin, Understanding How the Effects of Conditional Conservatism Measurement Bias Vary with the Research Context (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=3416443 or http://dx.doi.org/10.2139/ssrn.3416443

Mostafa Harakeh (Contact Author)

Lebanese American University ( email )

P.O.Box 36
Chouran-Beirut 1102 2801
Beirut
Lebanon

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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