Review of Accounting Studies

, Volume 12, Issue 1, pp 95–124 | Cite as

Asymmetric timeliness tests of accounting conservatism

  • J. Richard DietrichEmail author
  • Karl A. MullerIII
  • Edward J. Riedl


Recent accounting research employs an asymmetric timeliness measure to test the hypothesis that reported accounting earnings are “conservative.” This research design regresses earnings on stock returns to examine whether “bad” news is incorporated into earnings on a more timely basis than “good” news. We identify properties of the asymmetric timeliness estimation procedure that will result in biases in the test statistics except under very restrictive conditions that are rarely met in typical empirical settings. Using data series that are devoid of asymmetric timeliness in reported earnings, we show how these biases result in evidence consistent with conservatism. We conclude that the biased test statistics inherent in the asymmetric timeliness research design preclude using this method to measure conservatism; that these biases are irresolvable as they originate in the test’s specification; and that studies employing asymmetric timeliness tests cannot be interpreted as providing evidence of conservatism.


Capital markets Conservatism Asymmetric timeliness Sample truncation 

JEL Classifications

G10 M4 



We gratefully acknowledge useful comments by and discussions with Sudipta Basu, Anne Beatty, Joe Comprix, Ilia Dichev, Peter Easton, Paul Fischer, Glen Hansen, Paul Healy, Steve Huddart, SP Kothari, Christian Leuz, Jim McKeown, Jim Ohlson, Joshua Rosett, Terry Shevlin, Doug Skinner, Richard Sloan, Monica Stefanescu, Ram Venkataraman, Ross Watts, Hal White, Dave Wright, and workshop participants at the 2003 Minnesota Empirical Accounting Conference and the following universities: Harvard, Iowa, Michigan, Ohio State, Penn State, and Tulane. Previous drafts of this manuscript were titled “Using Stock Returns to Determine ‘Bad’ versus ‘Good’ News to Examine the Conservatism of Accounting Earnings.”


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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • J. Richard Dietrich
    • 1
    Email author
  • Karl A. MullerIII
    • 2
  • Edward J. Riedl
    • 3
  1. 1.Fisher College of BusinessThe Ohio State UniversityColumbusUSA
  2. 2.Smeal College of BusinessThe Pennsylvania State UniversityUniversity ParkUSA
  3. 3.Harvard Business SchoolSoldiers FieldBostonUSA

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