The pricing of conservative accounting and the measurement of conservatism at the firm-year level
By Jeffrey L. Callen, D. Segal, Ole‐Kristian Hope. 2010
173 citations recorded by the source corpus.
This paper analyzes the relation between equity prices and conditional conservatism and introduces a new measure of conservatism at the firm-year level. We show that the asymmetric properties of conservative accounting, the existence of non-accounting sources of information, and the properties of GAAP related to special items combine to generate a nonlinear relation between unexpected equity returns and earnings news (the shock to expected current and future earnings). Based on this model, we construct a conservatism ratio (CR) defined as the ratio of the current earnings shock to earnings news. CR measures the proportion of the total shock to expected current and future earnings recognized in current year earnings. Ranking firms according to CR, we show empirically that higher CR firms have more leverage, increased volatility of returns, more incidence of losses, more negative accruals, and increased volatility of earnings and accruals, consistent with the literature on conservative accounting.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/e6319321792ec37aba9c1e2357d1dd0c997d6f17
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In Accounting
- Juan Manuel García Lara
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- Zheng Wang
- Jeong‐Bon Kim
- Martin Walker
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In Finance
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Citations in the corpus
- Accounting Conservatism and Firm Investment Efficiency (2016, unknown): “To calculate CR, we follow Callen et al. (2010), estimating a pooled regression per industry across time using all sample years available (up to 2007 in our sample).”
- Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism (2009, unknown): “These expressions are both explicit (e.g., Ryan, 2006, p.3),2 and implicit (by researchers proposing such measures e.g., Callen et al., 2008).”
- Value of Cash Holdings and Accounting Conservatism (2011, unknown): “Consistent with Callen et al. (2010), we remove negative CR observations.”
- CEO Overconfidence and Stock Price Crash Risk (2016, background): “2 Prior literature has confirmed overconfidence or overoptimism in the thoughts of corporate managers and entrepreneurs (Ben-David et al. 2010; Camerer and Lovallo 1999).”
- Conditional conservatism and cost of capital (2011, methodology): “We depart from Francis et al. (2004) and Li (2009) in three main ways: (a) we use a firm-level measure of conditional conservatism (as in Callen et al. 2010) to overcome the possible biases in the Basu (1997) measure described by Dietrich, Muller, and Riedl (2007), Givoly et al. (2007) and…”
- Conditional conservatism and the limits to earnings management (2020, unknown): “First, we provide the first empirical evidence of a negative relation between conditional conservatism and accruals earnings management, consistent with the arguments of Watts (2003) and LaFond and Watts (2008) and with the analytical evidence of Chen et al. (2007) and Gao (2013).”
- Earnings management behaviors under different monitoring mechanisms: The case of Islamic and conventional banks (2016, background): “In contrast, Callen et al. (2010) argue that large firms, facing lower operational uncertainty, demand greater accounting conservatism.”
- The implications of research on accounting conservatism for accounting standard setting (2015, methodology): “At the time of writing this review, the Callen et al. (2010) measure has not been assessed for the problems highlighted by Patatoukas and Thomas in relation to Basu’s DT measure.”