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Conditional Conservatism: An Analysis of Nonlinearity and Lead-Lag Relations

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Authors
Baik, Bok; Hwang, Lee-Seok
Issue Date
2019-06
Publisher
College of Business Administration (경영대학)
Citation
Seoul Journal of Business, Vol.25 No.1, pp. 51-80
Keywords
Asset write-offsAsymmetric timelinessNonlinearity
Abstract
Recent studies have provided evidence that the association between earnings and contemporaneous returns is stronger when returns are negative, reflecting accounting conservatism. In this paper, we investigate two important aspects in this asymmetric timeliness of earnings: (1) whether the contemporaneous earnings-return relation is concave and (2) whether earnings show asymmetric timeliness with respect to lagged returns. We show that the relation between earnings and stock returns is more salient for extreme negative returns, implying a concave relationship between earnings and returns. We also find asymmetric timeliness with respect to lagged returns. Moreover, we find similar results using earnings line items such as special items and discontinued items. Overall, our evidence suggests that the Basu-type regression without considering these two aspects biases the extent of conditional conservatism. [ABSTRACT FROM AUTHOR] Copyright of Seoul Journal of Business is the property of Seoul National University, College of Business Administration and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
ISSN
1226-9816
Language
English
URI
https://hdl.handle.net/10371/168283
DOI
https://doi.org/10.35152/snusjb.2019.25.1.003
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 25, Number 1/2 (2019)
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