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Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism

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  • RAY BALL
  • S. P. KOTHARI
  • VALERI V. NIKOLAEV

Abstract

A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political, and institutional variables. Studies typically assume the Basu [1997] asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise‐linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure's validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm's operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which “unbooked” information (such as revised expectations about rents and growth options) is independent of other information, and discuss the conditions under which a proxy for this characteristic is the market‐to‐book ratio. We also conclude that much criticism of the Basu regression misconstrues researchers’ objectives.

Suggested Citation

  • Ray Ball & S. P. Kothari & Valeri V. Nikolaev, 2013. "Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 1071-1097, December.
    • Handle: RePEc:bla:joares:v:51:y:2013:i:5:p:1071-1097
    DOI: 10.1111/1475-679X.12026
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    References listed on IDEAS

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    Cited by:

    1. Mai Dao & Hassan R. HassabElnaby & Amal Said, 2015. "The Impact of Audit Committee and Shareholder Activism on the Association between Audit-Firm Tenure and Accounting Conservatism," Accounting and Finance Research, Sciedu Press, vol. 4(1), pages 112-112, February.
    2. Collins, Daniel W. & Hribar, Paul & Tian, Xiaoli (Shaolee), 2014. "Cash flow asymmetry: Causes and implications for conditional conservatism research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 173-200.
    3. Badia, Marc & Duro, Miguel & Penalva, Fernando & Ryan, Stephen, 2017. "Conditionally conservative fair value measurements," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 75-98.
    4. Kravet, Todd D., 2014. "Accounting conservatism and managerial risk-taking: Corporate acquisitions," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 218-240.
    5. Ray Ball & Gil Sadka & Ayung Tseng, 2022. "Using accounting earnings and aggregate economic indicators to estimate firm-level systematic risk," Review of Accounting Studies, Springer, vol. 27(2), pages 607-646, June.
    6. Marc Badia & Miguel Duro & Fernando Penalva & Stephen G. Ryan, 2021. "Debiasing the Measurement of Conditional Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 59(4), pages 1221-1259, September.
    7. Banker, Rajiv D. & Basu, Sudipta & Byzalov, Dmitri & Chen, Janice Y.S., 2016. "The confounding effect of cost stickiness on conservatism estimates," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 203-220.
    8. Hilary, Gilles & Hsu, Charles & Segal, Benjamin & Wang, Rencheng, 2016. "The bright side of managerial over-optimism," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 46-64.
    9. Panos N. Patatoukas, 2016. "Asymmetrically Timely Loss Recognition and the Accrual Anomaly. Discussion of Konstantinidi et al," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 166-175, March.
    10. Manganaris, Panayotis & Spathis, Charalambos & Dasilas, Apostolos, 2015. "The effects of mandatory IFRS adoption and conditional conservatism on European bank values," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 72-81.
    11. Mittal, Amit & Garg, Ajay Kumar, 2016. "How do Indian firms cope with a crisis? Earnings management characteristics of CNX Nifty 100 companies," MPRA Paper 85353, University Library of Munich, Germany.
    12. Kousenidis, Dimitrios V. & Ladas, Anestis C. & Negakis, Christos I., 2014. "Accounting conservatism quality of accounting information and crash risk of stock prices," The Journal of Economic Asymmetries, Elsevier, vol. 11(C), pages 120-137.
    13. Archana Jain & Chinmay Jain & Ashok Robin, 2020. "Does accounting conservatism deter short sellers?," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1075-1100, April.
    14. Walid Guermazi, 2023. "International financial reporting standards adoption in the European Union and earnings conservatism: a review of empirical research," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(2), pages 200-211, June.
    15. Qing L. Burke & Tim V. Eaton & Mengying Wang, 2019. "Trade liberalization and conditional accounting conservatism: evidence from import competition," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 811-844, October.
    16. Dmitri Byzalov & Sudipta Basu, 2016. "Conditional conservatism and disaggregated bad news indicators in accrual models," Review of Accounting Studies, Springer, vol. 21(3), pages 859-897, September.
    17. Adrian Doru, Bîgioi & Cristina Elena, Bîgioi, 2017. "Harmonization Of National Rules With The New International Recommendations On Corporate Governance. Case Study From Insurance Companies In Romania," Management Strategies Journal, Constantin Brancoveanu University, vol. 35(1), pages 105-113.
    18. Mohamed Khalil & Aydin Ozkanc & Yilmaz Yildiz, 2020. "Foreign institutional ownership and demand for accounting conservatism: evidence from an emerging market," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 1-27, July.
    19. Kimouche Bilal, 2021. "Measuring Accounting Conservatism in Financial Reports: A Comparison Between France and the United Kingdom," Journal of Social and Economic Statistics, Sciendo, vol. 10(1-2), pages 56-75, December.
    20. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2016. "Accounting conservatism and firm investment efficiency," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 221-238.

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