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Asymmetric timeliness tests of accounting conservatism

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  • J. Richard Dietrich

    (The Ohio State University)

  • Karl A. Muller

    (The Pennsylvania State University)

  • Edward J. Riedl

    (Soldiers Field)

Abstract

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.

Suggested Citation

  • J. Richard Dietrich & Karl A. Muller & Edward J. Riedl, 2007. "Asymmetric timeliness tests of accounting conservatism," Review of Accounting Studies, Springer, vol. 12(1), pages 95-124, March.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:1:d:10.1007_s11142-006-9023-y
    DOI: 10.1007/s11142-006-9023-y
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    Cited by:

    1. Juan Manuel García Lara & Beatriz García Osma & Fernando Penalva, 2011. "Conditional conservatism and cost of capital," Review of Accounting Studies, Springer, vol. 16(2), pages 247-271, June.
    2. William H. Beaver & Wayne R. Landsman & Edward L. Owens, 2012. "Asymmetry in earnings timeliness and persistence: a simultaneous equations approach," Review of Accounting Studies, Springer, vol. 17(4), pages 781-806, December.
    3. Juan Manuel García Lara & Beatriz García Osma & Fernando Penalva, 2009. "Accounting conservatism and corporate governance," Review of Accounting Studies, Springer, vol. 14(1), pages 161-201, March.
    4. Sudarshan Jayaraman & Lakshmanan Shivakumar, 2013. "Agency-based demand for conservatism: evidence from state adoption of antitakeover laws," Review of Accounting Studies, Springer, vol. 18(1), pages 95-134, March.
    5. Steven J. Monahan, 2008. "Discussion of “Is financial reporting shaped by equity markets or debt markets? An international study of timeliness and conservatism”," Review of Accounting Studies, Springer, vol. 13(2), pages 206-215, September.
    6. Jeffrey L. Callen & Dan Segal & Ole-Kristian Hope, 2010. "The pricing of conservative accounting and the measurement of conservatism at the firm-year level," Review of Accounting Studies, Springer, vol. 15(1), pages 145-178, March.

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