On the validity of asymmetric timeliness measures of accounting conservatism

J. Richard Dietrich, Karl A. Muller () and Edward J. Riedl
Additional contact information
J. Richard Dietrich: The Ohio State University
Karl A. Muller: The Pennsylvania State University
Edward J. Riedl: Boston University

Review of Accounting Studies, 2023, vol. 28, issue 4, No 9, 2150-2195

Abstract: Abstract This study extends the asymmetric timeliness measure (ATM) framework described in Ball et al. (Journal of Accounting Research 51(5): 1071–1097, 2013a) to investigate the validity of tests for differences in conservative accounting practices across firms and time. This extension is important because that framework is not designed to measure or test for differences in conservatism, which is the explicit focus of nearly all conservatism research. This extension identifies three structural biases (which we refer to as the misclassification, contemporaneous income, and growth biases) inherent in the Basu (Journal of Accounting and Economics 24(1): 3–37, 1997) ATM. We show that correcting for the contemporaneous income bias results in a substantial reduction in ATM estimates. Additionally, the estimated magnitude of the contemporaneous income bias is so large that the typically reported significantly positive relationship between conservatism and leverage and the negative relationship between conservatism and size become insignificant after correcting the traditional ATM to control for this bias. Also, the positive relationship between conservatism and book-to-market ratio is attenuated significantly. Developing empirical controls for the misclassification and growth biases identified in our framework is problematic, but one or both are expected to be sufficiently large as to raise significant concerns about results of conservatism studies that rely on the ATM. Until methods to control for or eliminate all sources of bias are established, we suggest that future research use ATMs that focus only on conditionally conservative accruals or on alternative measures of conditional conservatism.

Keywords: Conservatism; Asymmetric timeliness; Contemporaneous income bias; Endogeneity (search for similar items in EconPapers)
JEL-codes: G10 M41 (search for similar items in EconPapers)
Date: 2023
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-022-09684-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:28:y:2023:i:4:d:10.1007_s11142-022-09684-2

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-022-09684-2

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().