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

Content Provider	Springer Nature Link
Author	Brauer, Sebastian Westermann, Frank
Copyright Year	2012
Abstract	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.
Starting Page	111
Ending Page	129
Page Count	19
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	41
Issue Number	1
e-ISSN	15737179
Language	English
Publisher	Springer US
Publisher Date	2012-07-29
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Timely loss recognition Asymmetric persistence Conservatism Finance/Investment/Banking Accounting/Auditing Econometrics Operations Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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