The Conservatism Principle and the Asymmetric Timeliness of Earnings by Sudipta Basu: A Critical Summary

TABLE OF CONTENT
List of abbreviations AND SYMBOLS II
1. Introduction 1
2. The conservatism principle and the asymmetric timeliness of earnings – a summary 2
2.1. The author’s motivation 2
2.2. The asymmetric sensitivity of earnings to returns 2
2.3. Earnings-return association versus cash flow-return association 5
2.4. The asymmetric persistence of earnings changes conditional on news 7
2.5. Conservatism and the asymmetric effect on the earnings response coeffcients 9
2.6 Further testing 11
3. International differences in the effects of asymmetric timeliness on earnings 11
3.1 Common-law versus code-law countries 11
3.1.1 Classification-differences of bad news as a bias to measured conservatism 13
4. Conservatism and its impact on earnings quality 13
4.1. The significance of conservatism in different context settings 13
4.1.1. Uncoditional versus conditional conservatism 14
4.1.2. Non-contracting benefits of conservative accounting 14
4.1.3. Contracting benefits of conservative accounting 15
4.2. Evaluation of results 15
5. Conclusion 15
References 16
Ehrenwörtliche Erklärung 17

List of abbreviations and symbols

Symbols: α – Intersect β – Slope coefficient
Δ – Indicator for difference
DR – Dummy variable
P – Price
R – Stock Return
R2 – Measure for explanatory power u – Stock return
X – Earnings

Abbreviations:
CRSP - Center of Research on Security Prices
CFO – Cash flow from operations
CFOI - Cash flow from operating and investing activities
ERC – Earnings response coefficient
FASB - Financial Accounting Standards Board
IASB - International Accounting Standards Board
IFRS - International Financial Reporting Standards
NYSE/AMEX – New York Stock Exchange/American Stock Exchange
UK-GAAP – United Kingdom Generally Accepted Accounting Principles
US-GAAP - United States Generally Accepted Accounting Principles
XE - Earnings before extraordinary items and discontinued operations

1. Introduction
The seminar paper at hand summarizes and critically discusses the

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