Asymmetric Timeliness Research Articles

Strategic management of tax disclosure: asymmetric timeliness of tax footnote modifications

AbstractPrevious studies have shown that qualitative disclosure contains information that facilitates the assessment of future firm outcomes. We first connect to this literature on early signals by showing that qualitative disclosure also specifically contains information about future ETR as one relevant firm outcome. Using the tax footnote from 10-K filings of all publicly traded U.S. firms over the period from 2000 to 2021, we show that year-over-year tax footnote modifications are an early signal of impending changes in ETR. When specifically considering the timeliness of this signal, we find that tax footnote modifications are associated with future changes in ETR at least three years in advance. Second, we investigate, as our main focus of analysis, asymmetry in timeliness. Here, we find that tax footnote modifications preceding increases in ETR occur relatively earlier (and are greater) than do (are) tax footnote modifications preceding decreases in ETR. We additionally use word lists to directly identify relevant underlying processes for changes in ETR and to investigate asymmetric timeliness conditional on the underlying process. Overall, our results indicate that firms strategically manage their tax disclosure in accordance with the ”accounting conservatism” hypothesis proposed by Basu (1997).

Impact of Accounting Conservatism on the Informativeness of Current Stock Prices for Future Earnings

Purpose: The purpose of this paper is to examine how accounting conservatism affects the relation between current stock returns, current earnings, and future earnings.
 Design/methodology/approach: To achieve the purpose of this paper, we divide accounting conservatism into con-ditional and unconditional conservatism and investigate whether the relation between current stock returns, current earnings, and future earnings is different depending on the type of conservatism.
 Findings: We find that the current stock returns of firms with strong conditional conservatism contain more in-formation about future earnings. However, our results show that informativeness of current stock returns on future earnings does not change under unconditional conservatism. 
 Research limitations/implications: Even though we use prior research to capture the proxy for accounting con-servatism, the extent or magnitude of accounting conservatism may not be properly measured by our proxies. However, despite of these limitations, our results still have the following meanings.
 Originality/value: Our results suggest that compared to unconditional conservatism, conditional conservatism re-flects managerial discretion over timely recognition of bad news and results in faster recognition of the impact of future earnings on current earnings. More specifically, our result indicates that conditional conservatism decreases the informativeness of current stock returns for future earnings due to asymmetric timeliness. And our result also provides indirect evidence that conditional conservatism reflects managerial discretion over timely loss recognition compared to unconditional conservatism, and thereby, deteriorates the informativeness of current returns for future earnings.

Identifying accounting conservatism in the presence of skewness

AbstractThe asymmetric timeliness (AT) coefficient as a measure of accounting conservatism has been subject to much debate. We clarify the conditions under which the AT coefficient identifies accounting conservatism in the presence of skewness. Specifically, using an extensive simulation-based approach, we examine the joint impact of return skewness, earnings skewness, and return endogeneity. We show that skewness of returns and earnings distorts the AT coefficient as a measure of conservatism when returns are endogenous. While earnings skewness is a predicted consequence of conditional conservatism, return skewness is arguably unrelated to conservative reporting and cannot be tackled by simple skew reducing transformations or outlier-robust estimators. Empirically, we analyze AT and skewness of firms sorted on size and MTB, highlighting the importance of constant skewness across groups for accurate comparisons of accounting conservatism.

Corporate Governance and Accounting Conservatism in Nigeria: An Empirical Investigation

This study investigated the effect of Corporate Governance (represented by Asymmetric Timeliness Measure and Market To Book Ratio) on accounting conservatism (represented by Gender Composition of the Board, Composition of Audit Committee and Risk Management Committee) of quoted firms in Nigeria. Ex-post facto research design was used. The population of this study comprised 17 food and beverage firms listed on the Nigerian Exchange Group (NGX) as at December 31st, 2021 from which 14 were selected by Purposive sampling technique. The study period was 10 years (2012 to 2021). Data were obtained from the published audited financial statements. The study used descriptive and inferential statistics for data analysis. Findings from the study revealed that Corporate Governance jointly had no significant effect on Asymmetric Timeliness Measure (ATM), AdjR2 = 0.035; F (6, 133) = 1.84, P-Value= 0.09 and Market To Book Ratio (MTB), AdjR2= 0.109; F = 11.70, P-Value= 0.07. This study concluded that Corporate Governance had no significant impact on Accounting Conservatism of quoted firms in Nigeria. It was recommended that policy makers should pay close attention to corporate governance policies and measures such as the Gender Composition of the Board, Composition of Audit Committee and Risk Management Committee in order to enhance accounting conservatism and bring about accounting conservatism and by extension improve the quality of financial statements.

Peer performance and the asymmetric timeliness of earnings recognition

This paper investigates the impact of peer performance on the asymmetric timeliness of earnings recognition. We find a positive relationship between peers' weak performance and timely bad news disclosure. Our results are robust to a variety of tests, including instrument variable approach, difference-in-differences analysis, alternative measures and subsample analysis. Consistent with the notion that weak peer performance increases investors' demand for information, the relationship is more profound for firms suffering from high information externality, with weak governance and high information asymmetry. Furthermore, we find that the relationship is difficult to reconcile with the explanation of managers' herding behaviour. In addition, we show that conservative accounting information disclosure due to weak peer performance alleviates managerial bad news hoarding and information asymmetry for underperforming firms, but distorts investment decisions for outperforming firms. We highlight the spillover effect of peer performance on conservative accounting information and the related heterogeneous outcomes.

Strategic emphasis and accounting conservatism

PurposeThe authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.Design/methodology/approachTo examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.FindingsSE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.Research limitations/implicationsImplication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.Originality/valueThis study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.

재량적 이익유연화와 악재에 대한 비대칭적 인식이 이익유연화와 정보비대칭의 비선형적 관계성에 미치는 효과

Previous studies have reported conflicting results on the relationship between earnings smoothing and information asymmetry depending on the positive and negative roles of earnings smoothing. For these contradictory results, Jayaraman(2008) confirmed that there is a U-shaped non-linear relationship between earnings smoothing and information asymmetry due to discretionary earnings smoothing. This study tried to verify the nonlinearity of earnings smoothing and information asymmetry by focusing on the conflicting correlation between cash flow and accrual between discretionary earnings smoothing and asymmetric recognition of loss recognition(ATLR). The main findings are as follows. First, as the frequency of ATLR increases, the negative correlation between cash flow and accrual weaken and earnings volatility increase；thus the frequency of ATLR is a factor that lowers the level of earnings smoothing. Second, earnings smoothing and information asymmetry have a positive (＋) relationship in the smooth earnings group, whereas, earnings smoothing and information asymmetry have a negative (-) relationship in the volatile earnings group. This result means a non-linear relationship between earnings smoothing and information asymmetry depending on the volatility of earnings. Third, it is found that information asymmetry increased as the frequency of ATLR increased. This means that as the frequency of ATLR increases, the volatility of earnings increases, and uncertainty about investors’ future earnings and cash flow forecasts increases, resulting in increased information asymmetry.
 Finally, discretionary earnings smoothing provides a positive (＋) effect to earnings smoothing based on the negative (-) correlation between cash flow and accrual, and results in a positive (＋) relationship between earnings smoothing and information asymmetry. On the contrary, ATLR provides a negative (-) effect on earnings smoothing based on the positive (＋) correlation between cash flow and accrual, and results in a negative (-) relationship between earnings smoothing and information asymmetry. As a result, a non-linear relationship between earnings smoothing and information asymmetry is induced from the conflicting correlation of cash flow and accrual between discretionary earnings smoothing and ATLR.

Understanding How the Effects of Conditional Conservatism Measurement Bias Vary with the Research Context

We re-examine previous seminal studies on conditional conservatism (CC) that apply the asymmetric timeliness (AT) measure of Basu [(1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3–37. https://doi.org/10.1016/S0165-4101(97)00014-1] and compare the outcomes with those based on the modified AT (MAT) measure of Badia et al. [(2021). Debiasing the measurement of conditional conservatism. Journal of Accounting Research, 59(4), 1221–1259. https://doi.org/10.1111/1475-679X.12366] and the spread in conditional variances (SCV) measure of Dutta and Patatoukas [(2017). Identifying conditional conservatism in financial accounting data: Theory and evidence. The Accounting Review, 92(4), 191–216. https://doi.org/10.2308/accr-51640]. Our conclusions are threefold. First, all three measures yield similar inferences in interrupted time-series settings that examine the change in CC following a policy mandate. Second, the inferences drawn from the AT measure in studies that model the determinants of CC based on cross-sectional settings are more sensitive to test specifications and research designs. Third, across the three measures, MAT shows the best empirical performance in terms of aligning with existing theories while being less affected by AT bias.

Busy boards and accounting conservatism – an Australian perspective

PurposeThis paper aims to examine the association between busy directors on corporate boards and accounting conservatism.Design/methodology/approachThe authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues.FindingsThe presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings.Practical implicationsThis paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties.Originality/valueThis research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.

Why Is Asymmetric Timeliness of Earnings Priced?

Why Is Asymmetric Timeliness of Earnings Priced?

Asymmetric Cost Behaviour and Earnings Quality in the European Context

This study investigates the relationship of asymmetric cost behaviour with earnings quality for European listed firms. We employ a sample that consists of 11,416 firm-year observations of European listed firms over the period 2005-2019 to explore the relationship of asymmetric cost behaviour with (i) the managerial incentives to meet earnings targets, (ii) conditional conservatism, (iii) the level of operating accruals, and (iv) earnings smoothing. Our empirical evidence indicates that the presence of managerial incentives to meet earnings targets decreases the intensity of SG&A cost stickiness. We also document that asymmetric timeliness estimates in the conditional conservatism estimation models have an upward bias unless these models do not control for asymmetric cost behaviour. Finally, it seems that the level of operating accruals and earnings smoothing are more sensitive to sales decreases than sales increases.

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

Real earnings smoothing and crash risk: Evidence from Japan

AbstractI focus on the relationship between real earnings smoothing and one‐year‐ahead firm‐specific crash risk in Japan and investigate the effect of financial institutional ownership and the implementation of J‐SOX on the above relationship. Specifically, I hypothesize that the garbling real earnings smoothing is positively associated with stock price crash risk, and the informative real earnings smoothing is negatively associated with stock price crash risk. My results show that the crash risk increases as the garbling real earnings smoothing increases due to the managerial concealment of bad news about firms’ prospects. However, there is no significant relationship between the informative real earnings smoothing and crash risk. I further find that the relation between garbling real earnings smoothing and crash risk is constrained by effective external monitoring by stable institutional investors and the implementation of J‐SOX. Further evidence indicates that there is a significant and negative relationship between the garbling real earnings smoothing and asymmetric timeliness with respect to bad news. These results suggest that managers undertake the garbling component of real earnings smoothing to withhold the negative private information, resulting in the increase of downside risk of firms’ stock price. Overall, this study investigates the role of real earnings smoothing in the negative information transmission by managers in Japanese firms.

Accounting Conservatism and Intellectual Capital: Evidence From Turkey With Comparison Models and Sectors

The aim of this study is to investigate the relevance between accounting conservatism and intellectual capital in the context of the contribution of accounting conservatism to intellectual capital. Four different measurement methods [the asymmetric timeliness of the earnings, market-to-book ratio, asymmetry of the accruals and cash flows and negative accruals] were employed in the study to measure both accounting conservatism and intellectual capital. In this study, research data based on listed companies in manufacturing industry and financial institutions of Borsa Istanbul (BIST) 100 Index in Turkey. The method of the study was the panel data analysis in which the effect of accounting conservatism on intellectual capital was examined based on the data of the predetermined this companies for 2006-2017 period. As a result of the findings, it was determined that the companies care about intellectual capital, and although there is a difference according to the measurement methods, accounting conservatism has an effect on intellectual capital, which is observed both positively that more prominent in financial institutions and negatively, and companies that have conservative accounting policies.

Debiasing the Measurement of Conditional Conservatism

ABSTRACTBasu's [“The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24 (1997): 3–37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, “biases”), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas’ [“More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism.” The Accounting Review 86 (2011): 1765–1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility‐related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo‐dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism.

Does a Manager Respond to a Going-Concern Audit Opinion with an Asymmetry in Gain and Loss?

In this paper, I investigate the relationship between previous going-concern audit opinions and subsequent asymmetric timeliness in accounting. Using the time-series and price-based models and conservatism proxy, I find that firms with going-concern audit opinions subsequently report losses in a more timely manner than firms that did not receive going-concern audit opinions. Furthermore, I also find that firms exiting going-concern audit opinions are more likely to report losses rather than gains in a timely manner, compared to firms non-exiting from going-concern opinions. This study extends the prior research by exploring the association between going-concern opinions and accounting conservatism from the perspective of client firms—that is, how firms behave strategically and conservatively to bypass going-concern opinions, once the firms had received previous going-concern opinions.

Debiasing the Measurement of Conditional Conservatism

Basu's [“The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics 24 (1997): 3–37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, “biases”), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas’ [“More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism.” The Accounting Review 86 (2011): 1765–1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility-related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo-dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism.

Asymmetric Timeliness in Earnings: Insights from Earnings Disaggregation

We revisit the asymmetric timeliness of earnings as proposed by Basu (1997). For a large sample of US firm years from 1970-2019, we show that earnings are asymmetrically timely with respect to bad economic news, and that this is robust to the declining timeliness of good news, different time periods, changes in accounting standards and changes in sample firms. When we disaggregate earnings into its market, industry and firm idiosyncratic sources, it is apparent that asymmetrical timeliness is restricted to the idiosyncratic component. This result supports the argument in Watts (2003), that asymmetric timeliness is primarily a response to information asymmetry issues in contracts that rely on accounting information.

Financial reporting quality following the corporate governance reforms: A conditional conservatism perspective

This study examines the quality of financial reporting during the period following the corporate governance reforms in Malaysia, as motivated by the importance of investors’ needs for high-quality financial reporting. Using the asymmetric timeliness of the earnings model, we analysed the sample of 6,819 firm-year observations of Malaysian listed companies from 2002 to 2011. The findings show evidence of the high quality of reporting following the corporate governance reforms. We found that firms have reported a more timely recognition of losses than gains in the post-reform period. Our results suggest that conditional conservatism has been prevalent during the period, and the results are robust even after conducting extensive specification tests. This study suggests that after the corporate governance reforms, Malaysian companies’ financial statements have been more reliable for investors in making investment decisions.

Conservatism, Earnings Quality, and Stock Prices - Indonesian Evidence

Research aims: This research investigates the association of conservatism (both conditional and unconditional) with quality of earnings as well as with stock prices on companies listed on the Indonesia Stock Exchange (IDX).Design/Methodology/Approach: The research uses a sample of 846 observations of publicly listed companies on the Indonesian Stock Exchange for the fiscal year that ends on December 31, 2016 through 2018. Conditional conservatism is measured by using an asymmetric timeliness measure from Basu (ATMB). Net income ratio (CFO/NI) is a proxy for earnings quality whereas ratio between market value and book value (MTB) is a measure of unconditional conservatism. The data used in this study are obtained both from Indonesian Stock Exchange database, and from company annual reports.Research findings: The study finds that all companies analyzed implement conservative accounting policies and practices. Besides, quality of earnings and stock prices are negatively associated with conditional conservatism. This research also proves that stock price negatively associated with unconditional conservatism, whereas unconditional conservatism does not associated with earnings quality.Theoretical contribution/ Originality: This study enriches the existing literature about conservatism, especially in emerging market environment. Moreover, this study discusses a set of conservatism that consist of conditional and unconditional conservatism. This may give a complete picture of conservatism practices adopted by Indonesian companies.Practitioner/Policy implication: Since conservatism can solve agency cost problems, the result of this study may affect the way a company produce useful information for interest parties.Research limitation/Implication: The use of the purposive sampling method limits generalizations, because sample designs could not be assumed to characterize all companies listed on IDX.