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Conditional Conservatism of Aggregate Accounting Earnings

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  • Dongkuk Lim
  • Kenneth Zheng

Abstract

We examine whether or not conditional conservatism is observed at the aggregate level. Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the interactive slope coefficient measuring the difference in sensitivity for aggregate accounting earnings is approximately three times as sensitive to negative returns as it is positive returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables to the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as a gain or loss proxy the inclusion of macroeconomic indicators and discount rate proxies into the regression model increases the adjusted R2 from 5% to 53%. Based on empirical evidence from this study we recommend that researchers who study the relation between aggregate accounting earnings and the fundamental characteristics of accounting information use both macroeconomic indicators and discount rate variables as explanatory variables in regression models.

Suggested Citation

  • Dongkuk Lim & Kenneth Zheng, 2014. "Conditional Conservatism of Aggregate Accounting Earnings," Accounting and Finance Research, Sciedu Press, vol. 3(4), pages 115-115, August.
    • Handle: RePEc:jfr:afr111:v:3:y:2014:i:4:p:115
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    References listed on IDEAS

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    1. Ryan Lafond & Sugata Roychowdhury, 2008. "Managerial Ownership and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 101-135, March.
    2. Konchitchki, Yaniv & Patatoukas, Panos N., 2014. "Accounting earnings and gross domestic product," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 76-88.
    3. Penman, Stephen H., 1987. "The distribution of earnings news over time and seasonalities in aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 18(2), pages 199-228, June.
    4. Lakshmanan Shivakumar, 2010. "Discussion of Aggregate Market Reaction to Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 335-342, May.
    5. Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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