On the validity of asymmetric timeliness measures of accounting conservatism

This study extends the asymmetric timeliness measure (ATM) framework described in Ball et al. (Journal of Accounting Research 51(5): 1071–1097, 2013a) to investigate the validity of tests for differences in conservative accounting practices across firms and time. This extension is important because that framework is not designed to measure or test for differences in conservatism, which is the explicit focus of nearly all conservatism research. This extension identifies three structural biases (which we refer to as the misclassification, contemporaneous income, and growth biases) inherent in the Basu (Journal of Accounting and Economics 24(1): 3–37, 1997) ATM. We show that correcting for the contemporaneous income bias results in a substantial reduction in ATM estimates. Additionally, the estimated magnitude of the contemporaneous income bias is so large that the typically reported significantly positive relationship between conservatism and leverage and the negative relationship between conservatism and size become insignificant after correcting the traditional ATM to control for this bias. Also, the positive relationship between conservatism and book-to-market ratio is attenuated significantly. Developing empirical controls for the misclassification and growth biases identified in our framework is problematic, but one or both are expected to be sufficiently large as to raise significant concerns about results of conservatism studies that rely on the ATM. Until methods to control for or eliminate all sources of bias are established, we suggest that future research use ATMs that focus only on conditionally conservative accruals or on alternative measures of conditional conservatism.

This version of the article has been accepted for publication, after peer review (when applicable) and is subject to Springer Nature’s AM terms of use, but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: http://dx.doi.org/10.1007/s11142-022-09684-2

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Work Title On the validity of asymmetric timeliness measures of accounting conservatism
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Open Access
Creators
  1. J. Richard Dietrich
  2. Karl A. Muller
  3. Edward J. Riedl
Keyword
  1. Conservatism
  2. Asymmetric timeliness
  3. Contemporaneous income bias
  4. Endogeneity
License In Copyright (Rights Reserved)
Work Type Article
Publisher
  1. Review of Accounting Studies
Publication Date May 2, 2022
Publisher Identifier (DOI)
  1. https://doi.org/10.1007/s11142-022-09684-2
Deposited November 12, 2023

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  • Added dmr2_RAST_submission-1.pdf
  • Added Creator J. Richard Dietrich
  • Added Creator Karl A. Muller
  • Added Creator Edward J. Riedl
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    Keyword
    • Conservatism, Asymmetric timeliness, Contemporaneous income bias, Endogeneity
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