On the time series measure of conservatism: a threshold autoregressive model

On the time series measure of conservatism: a threshold autoregressive model In this note we propose an alternative test specification for Basu’s (1997) time series measure of conservatism that is related to the threshold unit root test of Enders and Granger (1998). We argue that a regression of changes in earnings on the lagged levels—rather than lagged changes—, including an interaction term for negative values, has three conceptual advantages compared to the conventional setup: (1) a smooth, non-oscillating impulse-response pattern to an unexpected shock in earnings (2) a more efficient estimate of persistence in the long run and (3) it can be extended to higher order autoregressive processes. We apply both approaches to a common dataset of firms from the S&P500 index. We confirm the conventional finding that negative shocks are transitory and display stronger mean reversion than positive shocks. However, while most of the literature reports mixed evidence on positive shocks, we find clear evidence that positive shocks are transitory as well. In a Monte Carlo simulation we explain this finding by documenting that larger standard errors in the Basu specification can lead to incorrect inference when the decision between persistent and transitory shocks is close. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

On the time series measure of conservatism: a threshold autoregressive model

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0302-3
Publisher site
See Article on Publisher Site

References

  • The time series properties of annual earnings
    Albrecht, WS; Lookabill, LL; McKeown, JC
  • Earnings quality in uk private firms: comparative loss recognition timeliness
    Ball, R; Shivakumar, L
  • Some time series properties of accounting income
    Ball, R; Watts, R
  • Incentives versus standards: properties of accounting income in four east asian countries
    Ball, R; Robin, A; Wu, JS

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