On the estimation of the asymmetric timeliness of earnings: Inference and bias corrections

Recent studies show that regression-based tests of the asymmetric timeliness of earnings may be invalid. We develop an econometric model showing that these tests correctly identify whether or not earnings are conservative; however, the inclusion of future rents in equity values causes the regression coefficients to mismeasure the degree of conservatism. This mismeasurement biases cross-sectional comparisons of the degree of conservatism; however, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons. We empirically validate our predictions and show that the ratio measure is fairly stable over time and is positively associated other conservatism measures. JEL classification: M41, G10, G30, N20 * Corresponding author. Contact information: 110 Westwood Plaza, D416, Los Angeles, CA 90095; [email protected] † Contact information: 701 Tappan Street, Ann Arbor, MI 48109; [email protected] Peterson appreciates financial support from the Paton Fund. We appreciate helpful comments from Peter Demerjian, Carla Hayn, Eddie Riedl and workshop participants at UCLA. On the estimation of the asymmetric timeliness of earnings: Inference and bias corrections Abstract: Recent studies show that regression-based tests of the asymmetric timeliness of earnings may be invalid. We develop an econometric model showing that these tests correctly identify whether or not earnings are conservative; however, the inclusion of future rents in equity values causes the regression coefficients to mismeasure the degree of conservatism. This mismeasurement biases cross-sectional comparisons of the degree of conservatism; however, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons. We empirically validate our predictions and show that the ratio measure is fairly stable over time and is positively associated other conservatism measures. Recent studies show that regression-based tests of the asymmetric timeliness of earnings may be invalid. We develop an econometric model showing that these tests correctly identify whether or not earnings are conservative; however, the inclusion of future rents in equity values causes the regression coefficients to mismeasure the degree of conservatism. This mismeasurement biases cross-sectional comparisons of the degree of conservatism; however, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons. We empirically validate our predictions and show that the ratio measure is fairly stable over time and is positively associated other conservatism measures. JEL classification: M41, G10, G30, N20