Measuring Reporting Conservatism
Accounting Review, Vol. 82, No. 1, p. 65, January 2007
Posted: 27 Sep 2006 Last revised: 25 Jul 2008
There are 2 versions of this paper
Date Written: January 2007
Abstract
The paper examines the power and reliability of the differential timeliness (DT) measure developed by Basu (1997) to gauge reporting conservatism. We identify certain characteristics of the information environment unrelated to conservatism that affect the DT measure and find that it is sensitive to the degree of uniformity in the content of the news during the examined period, the types of events occurring in the period, and firms' disclosure policies. Our tests, based on both actual and simulated data, indicate that assessing the extent of reporting conservatism using this measure requires the recognition of, and control for, these characteristics. We also find that the difference in the timeliness of reporting bad versus good news is likely to be more pronounced than previously reported. Further, we provide additional evidence on the negative association between the DT measure and alternative aspects of conservatism, suggesting that the exclusive reliance on any single measure to assess the overall conservatism of a reporting regime (firms, countries or time periods) is likely to lead to incorrect inferences.
Keywords: Conservatism, Asymmetric Timeliness, Disclosures, Quality of Earnings
JEL Classification: D21, D82, G14, M41
Suggested Citation: Suggested Citation