Measuring Reporting Conservatism

Accounting Review, Vol. 82, No. 1, p. 65, January 2007

Posted: 27 Sep 2006 Last revised: 25 Jul 2008

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Carla Hayn

University of California at Los Angeles - Anderson School of Management

Ashok Natarajan

California State Polytechnic University, Pomona

Multiple version iconThere 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

Givoly, Dan and Hayn, Carla and Natarajan, Ashok, Measuring Reporting Conservatism (January 2007). Accounting Review, Vol. 82, No. 1, p. 65, January 2007, Available at SSRN: https://ssrn.com/abstract=932973

Dan Givoly

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Carla Hayn (Contact Author)

University of California at Los Angeles - Anderson School of Management ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9225 (Phone)

Ashok Natarajan

California State Polytechnic University, Pomona ( email )

3801 W. Temple Avenue
Pomona, CA 91768
United States
(909) 869-4539 (Phone)

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