Measuring Reporting Conservatism
49 Pages Posted: 19 Oct 2004
Date Written: October 2004
The paper examines the power and reliability of the differential timeliness measure (DT) developed by (Basu (1997) to gauge reporting conservatism. We identify certain characteristics of the information environment unrelated to conservatism that affect the DT measure and find that the measure is sensitive to the degree of uniformity in the content of the news during the examined period, the types of events occurring in the period, and the firm's disclosure policies. Our tests, based on both actual and simulated data, indicate that assessing the extent of reporting conservatism requires the recognition of, and control for, these characteristics. We also find that the difference in the timeliness of bad versus good news is likely to be more pronounced than previously reported. Further, we provide additional evidence on the negative association between the DT measure and alternative aspects of conservatism, suggesting that the exclusive reliance on any single measure for assessing the overall conservatism of a reporting regime (firms, countries or time periods) is likely to lead to incorrect inferences.
Keywords: Conservatism, asymmetric timeliness, disclosures, quality of Earnings, earnings management
JEL Classification: M41, M44
Suggested Citation: Suggested Citation