The confounding effect of cost stickiness on conservatism estimates

Rajiv D. Banker, Sudipta Basu, Dmitri Byzalov and Janice Y.S. Chen

Journal of Accounting and Economics, 2016, vol. 61, issue 1, 203-220

Abstract: Sales decreases affect earnings more than sales increases because of cost stickiness. We hypothesize that this correlated omitted variable constitutes a confounding effect in standard asymmetric timeliness models. Controlling for a piecewise linear effect of sales changes in these models decreases the measured asymmetric timeliness significantly and changes inferences about the average level of conservatism and the extent of cross-sectional variation in conservatism. Validation tests confirm that the asymmetry for sales changes is consistent with sticky costs and is distinct from conditional conservatism. Future empirical research on conditional conservatism should recognize the potential confounding effect of sticky costs.

Keywords: Timely loss recognition; Omitted variable bias; Overinvestment (search for similar items in EconPapers)
JEL-codes: D21 D23 M40 M41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165410115000488
Full text for ScienceDirect subscribers only

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:eee:jaecon:v:61:y:2016:i:1:p:203-220

DOI: 10.1016/j.jacceco.2015.07.001

Access Statistics for this article

Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

More articles in Journal of Accounting and Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().