Asymmetric Timeliness Tests of Accounting Conservatism

43 Pages Posted: 18 Sep 2006

See all articles by J. Richard Dietrich

J. Richard Dietrich

Ohio State University

Karl A. Muller

Pennsylvania State University - Department of Accounting

Eddie Riedl

Boston University - Questrom School of Business


Recent accounting research employs an asymmetric timeliness measure to test the hypothesis that reported accounting earnings are conservative. This research design regresses earnings on stock returns to examine whether bad news is incorporated into earnings on a more timely basis than good news. We identify properties of the asymmetric timeliness estimation procedure that will result in biases in the test statistics except under very restrictive conditions that are rarely met in typical empirical settings. Using data series that are devoid of asymmetric timeliness in reported earnings, we show how these biases result in evidence consistent with conservatism. We conclude that the biased test statistics inherent in the asymmetric timeliness research design preclude using this method to measure conservatism; that these biases are irresolvable as they originate in the test's specification; and that studies employing asymmetric timeliness tests cannot be interpreted as providing evidence of conservatism.

Keywords: capital markets, conservatism, asymmetric timeliness, sample truncation

JEL Classification: G10, M41, M44

Suggested Citation

Dietrich, J. Richard and Muller, Karl A. and Riedl, Edward J., Asymmetric Timeliness Tests of Accounting Conservatism. Review of Accounting Studies, Forthcoming, Available at SSRN:

J. Richard Dietrich (Contact Author)

Ohio State University ( email )

2100 Neil Avenue
Dept of Accounting & MIS
Columbus, OH 43210
United States
(614) 292-2082 (Phone)
(614) 292-2118 (Fax)

Karl A. Muller

Pennsylvania State University - Department of Accounting ( email )

Smeal College of Business
384 Business Building
University Park, PA 16802-3306
United States
814-865-0202 (Phone)
814-863-8393 (Fax)

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

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