More Evidence of Bias in the Differential Timeliness Measure of Conditional Conservatism

Despite the conceptual appeal and popularity of the differential timeliness (DT) measure of conditional conservatism proposed in Basu (1997), Dietrich et al. (2007) and Givoly et al. (2007) have identified considerable biases associated with that measure. We renew their call to avoid using the DT me...

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Bibliographic Details
Published in:The Accounting review 2011-09, Vol.86 (5), p.1765-1793
Main Authors: Patatoukas, Panos N., Thomas, Jacob K.
Format: Article
Language:English
Subjects:
Accounting
Bias
Coefficients
Conservatism
Earnings
Earnings per share
Estimation bias
Regression coefficients
Sampling bias
Statistical variance
Studies
Temporal currency
Time series
Variable coefficients
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Summary:Despite the conceptual appeal and popularity of the differential timeliness (DT) measure of conditional conservatism proposed in Basu (1997), Dietrich et al. (2007) and Givoly et al. (2007) have identified considerable biases associated with that measure. We renew their call to avoid using the DT measure because it is affected unexpectedly by two empirical regularities—namely, scale is negatively related to (1) deflated mean earnings and (2) variance of stock returns. Even though these regularities are unrelated to conditional conservatism, their joint effect is substantial and pervasive. More importantly, prior findings regarding time-series and cross-sectional variation in differential timeliness are confounded by corresponding variation in these regularities.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-10101