Journal article
Cash flow asymmetry: Causes and implications for conditional conservatism research
Journal of accounting & economics, Vol.58(2-3), pp.173-200
11/01/2014
DOI: 10.1016/j.jacceco.2014.08.010
Abstract
Earnings asymmetric timeliness captures both accrual and operating cash flow (CFO) asymmetric timeliness. Because recognition of operating cash flows does not reflect differential verification thresholds for recognizing unrealized gains versus losses, CFO asymmetry adds noise or bias to tests of conditional conservatism. We show that CFO asymmetry is predictable in the cross-section, and varies systematically with life-cycle characteristics. Removing CFO from earnings and using accruals-based measures of asymmetric timeliness eliminates several biases that prior studies have attributed to other sources. Moreover, accrual asymmetric timeliness varies in the cross-section as theory predicts. Going forward, we recommend researchers use accruals-based asymmetric timeliness measures when testing for conditional conservatism.
•Earnings-based measures of conditional conservatism capture both operating cash flow (CFO) asymmetric timeliness and accrual asymmetric timeliness. We argue that CFO asymmetry does not reflect differential verification thresholds for recognizing unrealized gains versus unrealized losses, but CFO does exhibit asymmetry in good news versus bad news environments.•We show that CFO asymmetry exhibits predictable cross-sectional variation with firms’ life cycle stage, which can bias tests of conditional conservatism.•We provide evidence that sources of bias documented in prior research are related to cash flow asymmetry. CFO asymmetry explains the anomalous lagged earnings asymmetry documented by Patatoukas and Thomas (2011), and explains the bias that Ball et al. (2013b) attribute to expected return/expected earnings covariance.•We show that using accruals as the dependent variable successfully removes many of the biases caused by cash flow asymmetry. We also show that accruals-based asymmetric timeliness estimates vary in cross-section as agency/contracting/litigation theories predict. Going forward, we recommend using accruals as the dependent variable in studies of conditional conservatism.
Details
- Title: Subtitle
- Cash flow asymmetry: Causes and implications for conditional conservatism research
- Creators
- Daniel W. Collins - University of IowaPaul Hribar - University of IowaXiaoli (Shaolee) Tian - The Ohio State University
- Resource Type
- Journal article
- Publication Details
- Journal of accounting & economics, Vol.58(2-3), pp.173-200
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jacceco.2014.08.010
- ISSN
- 0165-4101
- eISSN
- 1879-1980
- Language
- English
- Date published
- 11/01/2014
- Academic Unit
- Accounting
- Record Identifier
- 9984380387802771
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