On Estimating Conditional Conservatism
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In this article, the authors suggest that the explanation for the bias is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression, and that the correlation varies with returns, biasing asymmetric timeliness estimates.Abstract:
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 economical...read more
Citations
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A review of archival auditing research
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Accounting Conservatism and Stock Price Crash Risk: Firm-level Evidence.
Jeong-Bon Kim,Liandong Zhang +1 more
TL;DR: This paper found that conditional conservatism is associated with a lower likelihood of a firm's future stock price crash, and that the relation between conservatism and crash risk is more pronounced for firms with higher information asymmetry.
Journal ArticleDOI
Accounting Conservatism and Stock Price Crash Risk: Firm‐level Evidence
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Managerial Overconfidence and Accounting Conservatism: managerial overconfidence
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TL;DR: This paper found that overconfident managers will tend to accelerate good news recognition, delay loss recognition, and generally use less conservative accounting, and test whether external monitoring helps to mitigate this effect.
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