Accruals and the Asymmetric Timeliness of Earnings: A Decomposition Analysis

Wenhsin Hsu ()
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Wenhsin Hsu: National Taiwan University

Chapter 79 in Encyclopedia of Finance, 2022, pp 1829-1867 from Springer

Abstract: Abstract Since Basu (Journal of Accounting and Economics, 24, 3–37, 1997), the difference between the response of earnings to good news (as proxied by positive stock return) and its response to bad news (as proxied by negative stock return) has been referred to as evidence of asymmetric timeliness in the response of earnings to good and bad news and the difference has been termed a measure of asymmetric timeliness. This measure of asymmetric timeliness has been extensively used in assessing accounting conservatism and its economic consequences. In this study, I seek to contribute to the debate on the sources of asymmetric timeliness by testing for its existence across a range of components of earnings. When clean surplus earnings are decomposed into cash flow and accrual components, I find that asymmetric timeliness in operating cash flow is larger than that in accruals. Moreover, using articulated data, the decomposition across line items also finds little evidence with regard to the application of three prominent standards (i.e., the LCM rule, the impairment tests, and the bad debt provision) that incorporate asymmetric verification criteria. These results call into question whether asymmetric timeliness of earnings is a consequence of accounting conservatism.

Keywords: Conservatism; Asymmetric timeliness; Basu (1997) measure; Decomposition of clean surplus earnings (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-030-91231-4_79

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