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On the conditional conservatism measure: A robust estimation approach
Author(s) -
Kim Seil,
Ohlson James A.
Publication year - 2017
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12301
Subject(s) - econometrics , economics , mathematics , conservatism , skewness , outlier , earnings , statistics , estimation , ordinary least squares , accounting , management , politics , political science , law
Recent research, due to Patatoukas and Thomas (2011) and Ball, Kothari, and Nikolaev (2013), focuses on Basu's (1997) conditional conservatism measure and the existence of a denominator effect – whether the difference between the earnings‐return coefficients of bad and good news firms (‘the Basu coefficient’) is only due to the beginning‐of‐year price deflator. We address this issue head‐on by applying the Theil‐Sen (TS) estimation method, which obtains the same coefficient estimate regardless of the chosen deflator and is robust to outliers. Results show the following: (i) the Basu coefficient remains positive using TS; (ii) the Basu coefficients using TS are similar to those using OLS without scaling but much smaller than shown by scaled OLS; (iii) the scaled OLS estimates appear to be influenced by a few outliers; and (iv) OLS estimates are more volatile due to estimation error. In sum, the denominator effect does not overturn Basu's hypothesis but the magnitude and variation of the Basu coefficient is much smaller than traditional results show.