This study addresses simultaneity bias in piecewise linear forms of the earnings-return relation. We specify an overidentified system of simultaneous equations that incorporates both asymmetric earnings timeliness and asymmetric earnings persistence specifications and implement two-stage least squares for this piecewise linear system. Estimation of a system that is piecewise linear in endogenous variables presents several issues that are unprecedented in the accounting literature. Findings provide evidence that the asymmetric timeliness specification is particularly affected by simultaneity and that failing to correct for simultaneity results in coefficient estimates that potentially understate the degree of asymmetric earnings timeliness. Moreover, inferences regarding how conditional conservatism has evolved over time are sensitive to whether OLS or 2SLS coefficients are used as the basis of comparison.
Review of Accounting Studies – Springer Journals
Published: Nov 30, 2011
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