PDFAbstract: Basu (1997) is the main reference in the market-based accounting literature related to the measurement of conditional conservatism. However, the econometric specification of Basu’s model involves an endogeneity problem due to simultaneity in the variables used in its empirical application: earnings and returns. In this paper we analyse the effect of endogeneity on the Basu’s conditional conservatism measure by using two alternative estimation techniques: the usual Ordinary Least Squares, affected by endogeneity, and System Generalized Method of Moments, specially designed to deal with the endogeneity problem. We apply these estimation procedures to a comparative model of the conditional conservatism in order to analyse the effect of IFRS first adoption on conditional conservatism. Our results evidence that endogeneity problem exists, that it induces bias in the OLS estimations, and that biases can be large enough to modify empirical conclusions.
Keywords: Conditional conservatism, earnings conservatism, IFRS first adoption, market-based accounting research, panel data, System Generalized Method of Moments REFERENCES [1] André, P., and Filip, A., 2012. Accounting conservatism in Europe and the impact of mandatory IFRS adoption: Do country, institutional and legal differences survive. ESSEC Business School Cergy-Pontoise, WP 95021. [2] Arellano, M. y Bover, S.R., 1995. Another look at the instrumental variables estimation of error-components models. Journal of Econometrics, 68, 29-51. [3] Ball, R., 2004. Corporate Governance and Financial Reporting at Daimler-Benz (DaimlerChrysler) AG: From a “Stakeholder” toward a “Shareholder Value” Model. In C. Leuz, D. Pfaff and A. Hopwood: The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice, 103-143. Oxford: Oxford University Press. [4] Ball, R., Kothari, S.P. and Nikolaev, V.V., 2012. On estimating conditional conservatism. The Accounting Review, 88(3), 755-787. [5] Ball, R., Kothari, S.P. and Nikolaev, V.V., 2013. Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism. Journal of Accounting Research, 51(5), 1071-1097. [6] Ball, R.; Kothari, S.P. y Robin, A., 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29, 1-51. [7] Banker, R.D., Basu, S., Byzalov, D., and Chen, J.Y., 2015. The confounding effect of cost stickiness on conservatism estimates. Journal of Accounting and Economics. [8] Barth, M. E.; Landsman, W. R. and Lang, M. H., 2008. International Accounting Standards and accounting quality. Journal of Accounting Research, 46(3), 467-498. [9] Basu, S., 1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3-37. [10] Basu, S., 2005. Discussion of “Conditional and unconditional conservatism: concepts and modelling”. Review of Accounting Studies, 10(2/3), 311-321. [11] Beaver, W.H. and Ryan, S.G., 2005. Conditional and unconditional conservatism: concepts and modelling. Review of Accounting Studies, 10(2-3), 269-309. [12] Bliss, J.H., 1924. Management through accounts. New York: Ronald Press Company. [13] Blundell, R.W. and Bond, S.R., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115-143. [14] Cano-Rodriguez, M. and Nuñez-Nickel, M., 2015. Aggregation bias in estimates of conditional conservatism: theory and evidence. Journal of Business, Finance and Accounting, 42(1-2), 51-78. [15] Christie, A.A., 1990. Aggregation of test statistics: An evaluation of the evidence on contracting and size hypotheses. Journal of Accounting and Economics, 12(1), 15-36. [16] Collins, D.W., Hribar, P., and Tian, X.S., 2014. Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2), 173-200. [17] Daske, H.; Luzi Hail, C.L. and Verdi, R.S., 2008. Mandatory IFRS reporting around the world: early evidence on the economic consequences. Journal of Accounting Research, 46(5), 1085-1142. [18] Dechow, P.M.; Ge, W. and Schrand, C., 2010. Understanding earnings quality: a review of the proxies, their determinants and their Olga Fullana et al. International Journal of Economics and Management Systems http://iaras.org/iaras/journals/ijems
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Olga Fullana, Mariano Gonzalez, Juan M. Nave, David Toscano. (2016) Endogeneity Bias in the OLS Estimates of Basu’s Model . International Journal of Economics and Management Systems, 1 , 134-143
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