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Cash flow asymmetry: Causes and implications for conditional conservatism research

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  • Collins, Daniel W.
  • Hribar, Paul
  • Tian, Xiaoli (Shaolee)

Abstract

Earnings asymmetric timeliness captures both accrual and operating cash flow (CFO) asymmetric timeliness. Because recognition of operating cash flows does not reflect differential verification thresholds for recognizing unrealized gains versus losses, CFO asymmetry adds noise or bias to tests of conditional conservatism. We show that CFO asymmetry is predictable in the cross-section, and varies systematically with life-cycle characteristics. Removing CFO from earnings and using accruals-based measures of asymmetric timeliness eliminates several biases that prior studies have attributed to other sources. Moreover, accrual asymmetric timeliness varies in the cross-section as theory predicts. Going forward, we recommend researchers use accruals-based asymmetric timeliness measures when testing for conditional conservatism.

Suggested Citation

  • Collins, Daniel W. & Hribar, Paul & Tian, Xiaoli (Shaolee), 2014. "Cash flow asymmetry: Causes and implications for conditional conservatism research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 173-200.
    • Handle: RePEc:eee:jaecon:v:58:y:2014:i:2:p:173-200
    DOI: 10.1016/j.jacceco.2014.08.010
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    More about this item

    Keywords

    Conservatism; Asymmetric timeliness; Cash flow asymmetry;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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