On Estimating Conditional Conservatism
The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale e...
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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American Accounting Association
2014
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| Online Access: | http://hdl.handle.net/1721.1/87766 https://orcid.org/0000-0003-1120-1177 |
| _version_ | 1826208913386635264 |
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| author | Ball, Ray Kothari, S. P. Nikolaev, Valeri V. |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Ball, Ray Kothari, S. P. Nikolaev, Valeri V. |
| author_sort | Ball, Ray |
| collection | MIT |
| description | The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage. |
| first_indexed | 2024-09-23T14:14:17Z |
| format | Article |
| id | mit-1721.1/87766 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T14:14:17Z |
| publishDate | 2014 |
| publisher | American Accounting Association |
| record_format | dspace |
| spelling | mit-1721.1/877662022-10-01T19:58:56Z On Estimating Conditional Conservatism Ball, Ray Kothari, S. P. Nikolaev, Valeri V. Sloan School of Management Kothari, S. P. The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage. 2014-06-13T15:22:03Z 2014-06-13T15:22:03Z 2012-12 2011-02 Article http://purl.org/eprint/type/JournalArticle 0001-4826 1558-7967 http://hdl.handle.net/1721.1/87766 Ball, Ray, S. P. Kothari, and Valeri V. Nikolaev. “On Estimating Conditional Conservatism.” The Accounting Review 88, no. 3 (May 2013): 755–787. https://orcid.org/0000-0003-1120-1177 en_US http://dx.doi.org/10.2308/accr-50371 The Accounting Review Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf American Accounting Association SSRN |
| spellingShingle | Ball, Ray Kothari, S. P. Nikolaev, Valeri V. On Estimating Conditional Conservatism |
| title | On Estimating Conditional Conservatism |
| title_full | On Estimating Conditional Conservatism |
| title_fullStr | On Estimating Conditional Conservatism |
| title_full_unstemmed | On Estimating Conditional Conservatism |
| title_short | On Estimating Conditional Conservatism |
| title_sort | on estimating conditional conservatism |
| url | http://hdl.handle.net/1721.1/87766 https://orcid.org/0000-0003-1120-1177 |
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