Cross Sectional Variation in Cash Flow Asymmetric Timeliness and Its Effect on the Earnings-Based Measure of Conditional Conservatism

2012 ◽  
Author(s):  
Daniel W. Collins ◽  
Paul Hribar ◽  
Xiaoli (Shaolee) Tian
Keyword(s):  
Cash Flow ◽  
Cross Sectional ◽  
Asymmetric Timeliness ◽  
Conditional Conservatism

scholarly journals On Estimating Conditional Conservatism

2012 ◽  
Vol 88 (3) ◽  
pp. 755-787 ◽  
Author(s):  
Ray Ball ◽  
S. P. Kothari ◽  
Valeri V. Nikolaev
Keyword(s):  
Financial Reporting ◽  
Fixed Effects ◽  
Scale Effects ◽  
Data Availability ◽  
Omitted Variables ◽  
Firm Level ◽  
Cross Sectional ◽  
Asymmetric Timeliness ◽  
Conditional Conservatism ◽  
Fixed Effects Regression

ABSTRACT The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage. Data Availability: Data are publicly available from sources identified in the article.

Placebo Tests of Conditional Conservatism

2015 ◽  
Vol 91 (2) ◽  
pp. 625-648 ◽  
Author(s):  
Panos N. Patatoukas ◽  
Jacob K. Thomas
Keyword(s):  
Time Series ◽  
Financial Reporting ◽  
Data Availability ◽  
Share Price ◽  
Higher Moments ◽  
Archival Studies ◽  
Cross Sectional ◽  
Asymmetric Timeliness ◽  
Conditional Conservatism ◽  
Measures Of Performance

ABSTRACT Basu (1997) proposes a measure of financial reporting conservatism based on asymmetry in the conditional earnings/returns relation. Patatoukas and Thomas (2011) show upward bias in this measure, because a placebo—lagged earnings—also exhibits similar asymmetry. Ball, Kothari, and Nikolaev (2013a) and Collins, Hribar, and Tian (2014) propose alternative explanations for the bias and offer revised measures to overcome the bias. However, we find that both revised measures remain substantially upward-biased. In particular, a placebo based on lagged share price mimics time-series and cross-sectional variation observed for the revised measures. More generally, we find biases in the asymmetric timeliness specification because earnings, accruals, and other measures of performance are often related to second and higher moments of the distribution of returns. In addition to suggesting that the asymmetric timeliness specification be used with caution, our study illustrates the useful role placebos can play in archival studies. Data Availability: Data are available from the sources identified in the text.

Dead Hand Proxy Puts and Hedge Fund Activism

2018 ◽  
Vol 54 (4) ◽  
pp. 1615-1642
Author(s):  
Sean J. Griffith ◽  
Natalia Reisel
Keyword(s):  
Cash Flow ◽  
Hedge Fund ◽  
Cost Benefit ◽  
Free Cash Flow ◽  
Cross Sectional ◽  
Flow Problems ◽  
Banking Relationships ◽  
Hedge Fund Activism ◽  
The Cost ◽  
Sectional Analysis

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking the adoption of the provision to hedge fund activism. Furthermore, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

International financial reporting standards and conservatism in the Association of Southeast Asian Nations countries

2018 ◽  
Vol 26 (4) ◽  
pp. 487-510 ◽  
Author(s):  
Marziana Madah Marzuki ◽  
Effiezal Aswadi Abdul Wahab
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Content Type ◽  
Asymmetric Timeliness ◽  
Conditional Conservatism ◽  
Two Measures ◽  
Asean Countries ◽  
Laws And Regulations

Purpose The purpose of this paper is to investigate whether the convergence of IFRS in ASEAN countries resulted in an improvement in financial-reporting quality, and in particular with regards the degree of conditional conservatism of financial reporting. Then, the authors investigate whether the convergence to IFRS and the degree of conditional conservatism is influenced by corruption as a proxy for the strength of ASEAN jurisdiction legal and enforcement systems. Design/methodology/approach The sample of this study is based on 22,085 firm-year observations from three ASEAN countries, namely, Malaysia, Thailand and Singapore from 2008 to 2014. This study employs a panel least square regression to test the effect of IFRS on two measures of conservatism which are asymmetric timeliness and accrual-based loss recognition. The conservatism data are extracted from ORBIS, while data for corruptions are extracted from Corruption Perception Index (CPI) that was released by Transparency International. Findings This study finds Convergence of IFRS enhance conditional conservatism. The findings are robust for two measures of conservatism which are asymmetric timeliness and accrual-based loss recognition. The result on unconditional conservatism finds that IFRS reduce unconditional conservatism, which supports that the code-law structures of the ASEAN countries as characterized by unconditional conservatism is reduced after IFRS convergence. A further test indicates that corruption reduces conditional conservatism in more corrupt countries. Research limitations/implications This study focused on three ASEAN countries only, as they have consistent convergence dates to the IFRS. Therefore the result may not be generalized to other ASEAN countries. Practical implications The study provides implications to the regulators that IFRS enhance financial-reporting quality and reduce the randomness of decisions that are based on financial information as has been introduced by unconditional conservatism. Therefore it is important for the regulators to incorporate IFRS compliance into laws and regulations. Currently, IFRS compliance is not incorporated into laws and regulations for ASEAN countries, except for Malaysia. In Malaysia, Section 7 of the Financial Reporting Act 1997 (FRA) empowers the Malaysian Accounting Standards Board (MASB) to issue approved accounting standards for application in Malaysia. Under section 26D of the FRA, financial statements that are prepared or lodged with the Central Bank, Securities Commission or Registrar of Companies must comply with the standards issued by the MASB. Originality/value This paper extends the literature on the effect of IFRS on conservatism as it provides robust effect of IFRS on both conditional and unconditional conservatism. In addition, this study extends the literatures on the effect of corruptions in the relationship between IFRS and conditional conservatism.

Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

2016 ◽  
Vol 19 (03) ◽  
pp. 1650019 ◽  
Author(s):  
Surenderrao Komera ◽  
P. J. Jijo Lukose
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Emerging Market ◽  
Adjustment Costs ◽  
Group Affiliation ◽  
Cross Sectional ◽  
Speed Of Adjustment ◽  
Business Group Affiliation ◽  
Optimal Leverage ◽  
Target Leverage

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

Nonfinancial Stakeholder Orientation and Conditional Accounting Conservatism

2020 ◽  
Vol 23 (04) ◽  
pp. 2050031
Author(s):  
Qing Liao Burke ◽  
Mengying Wang ◽  
Yijia Eddie Zhao
Keyword(s):  
Financial Reporting ◽  
Agency Costs ◽  
Accounting Conservatism ◽  
Cross Sectional ◽  
Reporting Practices ◽  
Stakeholder Orientation ◽  
Conditional Conservatism ◽  
Increasing Trend

This study examines the relation between conditional accounting conservatism and nonfinancial stakeholder orientation. Using the staggered passage of constituency statutes to identify increases in nonfinancial stakeholder orientation, we document that firms report more conservatively after statute adoption. Cross-sectional analyses indicate the increase in conditional conservatism after statute enactment is more pronounced for firms with higher agency costs between shareholders and managers, and less pronounced for firms with customers that have greater bargaining strength. Collectively, our study sheds light on how the increasing trend of nonfinancial stakeholder orientation plays a role in shaping financial reporting practices.

Cash flow asymmetry: Causes and implications for conditional conservatism research

2014 ◽  
Vol 58 (2-3) ◽  
pp. 173-200 ◽  
Author(s):  
Daniel W. Collins ◽  
Paul Hribar ◽  
Xiaoli (Shaolee) Tian
Keyword(s):  
Cash Flow ◽  
Flow Asymmetry ◽  
Conditional Conservatism

Cross-Sectional Return Predictability in Taiwan Stock Exchange: An Empirical Investigation

2014 ◽  
Vol 17 (02) ◽  
pp. 1450010 ◽  
Author(s):  
Nusret Cakici ◽  
Kudret Topyan ◽  
Chia-Jane Wang
Keyword(s):  
Cash Flow ◽  
Predictive Power ◽  
Empirical Investigation ◽  
Stock Exchange ◽  
Return Predictability ◽  
Idiosyncratic Volatility ◽  
Short Term ◽  
Cross Sectional ◽  
Multiple Regressions ◽  
Taiwan Stock Exchange

This paper provides an analysis of the effectiveness of certain return predictors in Taiwan Stock Exchange (TWSE) from January 1990 to December 2011 by employing both portfolio method and cross-sectional regressions. While we found no statistically significant predictive power of beta, total volatility, and idiosyncratic volatility the two cheapness variables, book-to-market (BKMT) and cash-flow-to-price (FPR) ratios showed strong consistent economically and statistically significant predictive powers. In addition, our multiple regressions found predictive power in total volatility, short-term reversal (STREV), and market capitalization in the set of small stocks, while our all stock set showed predictive power only in total volatility and STREV.

scholarly journals Determinants of dividend behaviour in select indian companies - an empirical analysis

2013 ◽  
Vol 1 (1) ◽  
pp. 24-31
Author(s):  
Mohanraj V ◽  
Sounthri S
Keyword(s):  
Empirical Analysis ◽  
Cash Flow ◽  
Empirical Result ◽  
Flow Model ◽  
Firm Level ◽  
Cross Sectional ◽  
Dividend Policies ◽  
Indian Context ◽  
Main Determinants ◽  
Sectional Analysis

This study examines the Corporate Dividend Behaviour in the Indian context through Lintner‘s dividend model,Brittain‘s Cash Flow Model and Btittain‘s explicit Dividend Model. Results of this study will be uselful for designing dividend policies at the firm level and to analyze the saving behaviour at the macro level. The high dividend paying companies listed in NSE constitute the sample for the present study carried out as cross-sectional analysis for the year 2001-02 to 2011-12. The empirical result shows that the main determinants of current dividends are the Lagged Dividend and Current Earnings.

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