Conditional Conservatism of Aggregate Accounting Earnings

Abstract

Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we examine whether or not conditional conservatism is observed at the aggregate level. We find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the slope coefficient on the interaction variable measuring the difference in sensitivity of aggregate accounting earnings to equal-weighted aggregate stock market returns is approximately three times as high in periods with negative market returns as is in periods with positive market returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables into the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as the gain or loss proxy, the inclusion of macroeconomic indicators and discount rate proxies in the regression model increases the adjusted R 2 from 5% to 53%. Based on the empirical evidence from this study, we recommend that researchers who study the fundamental characteristics of accounting information in the context of aggregate accounting earnings include both macroeconomic indicators and discount rate variables as explanatory variables in their regression models in order to improve model specification.

Negative aggregate accounting earnings and gross domestic product: A perspective of conditional accounting conservatism at the macroeconomic level

“…Studies at aggregate and macroeconomic levels are driven by the "micro-to-macro" research stream focusing on the usefulness of accounting earnings at the macroeconomics level to predict GDP growth (Huang, 2015;Konchitchki & Patatoukas, 2014a;Konchitchki & Patatoukas, 2014b;Lalwani & Chakraborty, 2020;Min-Ho & Jeong, 2022;Sumiyana et al, 2019;Wang et al, 2015;Yoshinaga & Nakano, 2023). Evidence documenting the existence of conditional accounting conservatism at both the aggregate and macroeconomic levels is presented by Lim and Zheng (2014), Crawley (2015), Laurion and Patatoukas (2016), as well as Atmini (2019).…”

“…When linked with conditional accounting conservatism that presents at the macroeconomic level (Atmini, 2019;Crawley, 2015;Laurion & Patatoukas, 2016;Lim & Zheng, 2014), negative aggregate accounting earnings, which are more timely than positive aggregate accounting earnings, are hypothesized to have a higher ability to predict GDP growth. The empirical evidence has been provided by Gaertner et al (2020) for the context of the United…”

“…In other words, firm-level negative economic news exhibits a stronger association with accounting earnings than firm-level positive economic news. Further research documents the existence of conditional accounting conservatism at the aggregate and macroeconomic levels (Atmini, 2019;Crawley, 2015;Laurion & Patatoukas, 2016;Lim & Zheng, 2014). Specifically, it has been documented that aggregate accounting earnings tend to reflect more quickly on bad macroeconomic news than on good macroeconomic news.…”