Asymmetry in earnings timeliness and persistence: a simultaneous equations approach

Abstract

This study addresses simultaneity bias in piecewise linear forms of the earnings-return relation. We specify an overidentified system of simultaneous equations that incorporates both asymmetric earnings timeliness and asymmetric earnings persistence specifications, and implement two-stage least squares for this piecewise linear system. Estimation of such a system that is piecewise linear in endogenous variables presents several distinctive issues for which there exists no precedent in the accounting literature. Findings provide evidence that the asymmetric timeliness specification is particularly affected by simultaneity, and that failing to correct for simultaneity results in coefficient estimates that understate the degree of asymmetric earnings timeliness. Moreover, our findings suggest that asymmetric earnings timeliness has dissipated, not increased, over time when simultaneity is taken into account.