The confounding effect of cost stickiness on conservatism estimates

Conditional conservatism and disaggregated bad news indicators in accrual models

“…This is contrary to our estimates for inventory (column 2 in Panel A of Table 7). Thus, while cost stickiness affects operating accruals as shown by Banker et al (2016b), it does not explain our results for working capital accruals. Lawrence et al (2016) argue that the asymmetries in accruals are partly due to curtailment of underperforming operations.…”

“…22 The asymmetry for the longer-term indicators (employee growth and realized future cash flow) is significant for inventory but not for receivables, consistent with our argument that inventory reflects an earlier stage of the operating cycle than receivables. Banker et al (2016b) show that the piecewise-linear effect of sales changes on operating accruals is partly attributable to sticky costs. Cost stickiness arises from asymmetric adjustment of physical resources such as employees and equipment (e.g., Anderson et al 2003).…”

“…Future selling prices for inventory on hand will likely be lower than originally expected, which can lead to an inventory writedown. 8 Receivables are appraised ''in the light of the current economic Footnote 4 continued Banker et al (2015Banker et al ( , 2016b report that sales change has an asymmetric effect on operating accruals. We discuss other potential sources of accrual asymmetry in Sect.…”

“…While accrual asymmetry is often interpreted as conditional conservatism (e.g., Basu 1997;Ball and Shivakumar 2006;Collins et al 2014a), it could reflect asymmetric operational effects, such as cost stickiness (Banker et al 2016b) or curtailment (Lawrence et al 2016). In Table 7, we examine some of these alternative explanations.…”

“…With few exceptions, this research does not examine the role of detailed accounting data. Furthermore, while prior research often assumes that accrual asymmetry reflects conservatism, we test it against alternative explanations, such as curtailment (Lawrence et al 2016) and cost stickiness (Banker et al 2016b).…”