Conditional Conservatism of Aggregate Accounting Earnings

Dongkuk Lim and Kenneth Zheng

Accounting and Finance Research, 2014, vol. 3, issue 4, 115

Abstract: We examine whether or not conditional conservatism is observed at the aggregate level. Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the interactive slope coefficient measuring the difference in sensitivity for aggregate accounting earnings is approximately three times as sensitive to negative returns as it is positive returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables to the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as a gain or loss proxy the inclusion of macroeconomic indicators and discount rate proxies into the regression model increases the adjusted R2 from 5% to 53%. Based on empirical evidence from this study we recommend that researchers who study the relation between aggregate accounting earnings and the fundamental characteristics of accounting information use both macroeconomic indicators and discount rate variables as explanatory variables in regression models.

Date: 2014
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