5.3 Visual overview of the hypotheses: In the following tables a visual overview will be provided of the hypotheses in order to clarify the used models. Table 5. Visual overview of hypotheses 1: Sample: Sample Banks (Bank scope) Measuring Conservatism Period: 1997-2009 Model: Basu model Table 6a. Visual overview of hypotheses 2 (1997-2006): Sample: Sample Banks (Bank scope) Measuring Conservatism Period: 1997-2006 Model: Basu model Compare Table 6b. Visual overview of hypotheses 2 (2006-2009): Sample: Sample Banks (Bank scope) Measuring Conservatism Period: 2007-2009 Model: Basu model European
exclude earnings management or abandonment options. 3 The conservatism principle and the asymmetric timeliness of earnings Sudipta Basu 1997 Re-examination of the conservatism principle. Investigation of the effects of the conservatism principle on reported financial statements. The samples implemented for the test in this paper consist of all firm-year observations from 1963 with returns data on the center for research in security prices NYSE/AMEX monthly files, and with necessary accounting data on the Compustat annual industrial and research files. (United States). The paper extends research on the timeliness of earnings by pointing out that the timelines is asymmetrically greater for bad news than for goods news. S. Basu states that in efficient markets, stock returns symmetrically and quickly reflect all publicly available news, so he uses returns to measure news. The research of the conservatism principle is based on four predictions. For the first prediction: earnings is more timely or concurrently sensitive in reflecting publicly available bad news than good news the researcher used negative and positive S. Basu investigated the effects of the conservatism principle on reported financial statements and interprets conservatism as resulting in earnings reflecting bad news more quickly than good news. He indicated that the concurrent sensitivity of earnings to negative returns is two to six times as large as the concurrent sensitivity of earnings to positive returns and he also showed that positive earnings changes tend to persist whereas negative earnings changes 1990
unexpected annual stock returns to proxy for bad news and good news. For the other three predictions S.Basu used empirical tests. show a marked tendency to reverse. The conclusion of this paper is that earnings are timelier in reporting publicly available bad news about future cash flows than good news. 4 Discussion of “Conditional and Unconditional Conservatism: Concepts and Modeling” Sudipta Basu 2005 Further investigation of a model of Beaver and Ryan. Basu takes this model as a basis to give an answer on the research question: Why unconditional and conditional conservatism are more than mere substitutes, and provide evidence from the historical record. This is a discussion paper about conservatism that investigates a previous model of Beaver and Ryan. No test information is included. 2005 In this article Basu further react to a previous test model of Beaver and Ryan. They model, simulate and graph the effects of various factors on the nonlinear relation induced by conditional conservatism. They integrated in their model two separate algebraic analyses of unconditional and conditional conservatism. (e.g. Beaver and Ryan, 11; Ryan and Zarowin, 38) They made use of Monte Carlo analyses Because this is a discussion we will give a brief summary: Basu extends the model of Beaver and Ryan and says that in the future researchers should carefully consider the frictions between actual accounting practice and previous simple theoretical models. He stated that application of nonlinear estimation techniques is likely to improve the
paper researchers suggests two methodological improvements: (1) modeling international exposure to different jurisdictions as a effect. (2) Incorporating changes through time as an interaction effect in the full model. general equity market exposure appears to be positively associated with greater timeliness in earnings recognition, while regulatory enforcement is positively associated with the bias towards conservatism. 6 Discussion of The Timeliness of Income Recognition by European Companies: An analysis of Institutional and Market Complexity Bill Rees 2004 Sample consists of 366 firms. Period: 1987-1999. In this paper the researchers restrict their sample to cross-listed firms and incorporate measures of the scope of accounting disclosure, importance if the equity market, and the strength of the enforcement system in the various markets in which the firms are listed. January/March 2004 It’s a discussion about a model that is elaborated in section 5 of this table. The researchers attempted to develop our understanding of asymmetric recognition by incorporating causal factors into the model. Their underlying approach remains mostly based on the Basu model. The main conclusion is: in general, capital market pressure and regulatory impact each appear to lead to more conservative accounting, the joint effect being mitigated when both influences are strong and a trend towards greater conservatism has been documented for firms domiciled and listed in different markets.
conservatism. 8 International Differences in the Timeliness, Conservatism, and Classification of Earnings Peter F. Pope , Martin Walker † 1999 Analyze of the differences in the timeliness of income recognition between the U.S. and U.K. GAAP financial reporting regimes The sample consists of data for all December fiscal year-end nonfinancial firms listed in the U.S. (NYSE/AMEX) and UK (London Stock Exchange) during 1976-1996. Resources: Datastream and Compustat. 1999 This study compares conservatism of two measures of reported earnings across the US and UK accounting regimes.. With the basis of the Basu model (1997) they present a formal model in which the response of reported earnings to changes in market value varies according to whether the value change is good news or bad. In this design they present pooled results , annual cross-section results, and write-offs of large transitory losses were tolerated in the research design The research presents several suggestions to measure accounting conservatism in income recognition. Mainly the practitioners suggest that when evaluating comparative conservatism, it is important to capture two distinct properties of conservative accounting: delays in reporting good news and early recognition of bad news. The results of the model show that the degree of conservatism displayed by earnings before extraordinary items under US GAAP was higher than under UK GAAP and the results also indicate that under US GAAP conservatism is
relatively slow in recognizing good news in earnings. 9 Econometrics of the Basu Asymmetric Timeliness Coefficient and The Accounting Conservatism. (Working Paper) Ray Ball, S. P. Kothari, Valeri Nikolaev 2009 Analysis of the econometrics of the Basu asymmetric timeliness coefficient. The analysis addresses the conceptual and econometric challenges to the measure raised in the recent literature. This paper only proposes a model. No tests are done. First Draft : May 2006, Current version April 2009 The researchers present a model of prices leading earnings to analyze the econometrics of the Basu model (1997). The analysis addresses conceptual and econometric challenges to the measure raised in the recent literature and show that the Basu measure is unbiased under the null hypothesis of zero asymmetry. In this paper they demonstrate that any differential persistence in economic gains and losses does not explain the Basu coefficient and an extension of the Roychowdhurry and Watts (2007) analyze is made. Main conclusion of the paper is that the market to book ratio does not per se determine asymmetric timeliness; its effect arises because it is correlated with the amount of price revision associated with revisions in “unbooked” components such as growth option expectations.
10 The Impact of the Asian Financial Crisis on Conservatism and Timeliness of Earnings: Evidence from Hong Kong, Malaysia, Singapore, and Thailand. Vichitsarawong, Eng Li and Gary k. Meek 2010 Measuring conservatism and timeliness of earnings during the financial crisis in the late ninety’s in Hong Kong, Malaysia, Thailand and Singapore. Data about stock returns and earnings is obtained from the Global Vantage database. For the countries Hong Kong, Malaysia, Thailand and Singapore. For the years 1995 till 2004. The Basu-model is used to measure conservatism. This is done for the crisis and post-crisis period to asses the degree of conservatism during these periods and compares the crisis and post-crisis period. The level of conservatism during the crisis period is low as is the timeliness of earnings. During the post crisis period the level of conservatism increases 11 The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative Givoly D. and Hayn C. 2000 Fluctuations in the properties of earnings, accruals and cash flows are investigated over time in order to examine if these fluctuations are in line with the increase in the degree of conservatism. The data (obtained from compustat) contains 896 companies for 1968 till 1988. The methods used to asses conservatism are the Basu model, accrual based measures and measures. The research consist of US firms. The researches indicate that the last 20 years the degree of conservatism has increased significantly.