Abstract:
Prior research has considered the ability of earnings recognition tendencies to proxy for conditional conservatism, but has yet to fully explore the validity of the theoretical link between these tendencies and conditional conservatism. This study analytically and empirically examines the extent to which two common earnings recognition tendencies, symmetric timeliness and asymmetric timeliness, are consistent with the theoretical definition of conditional conservatism. First, I demonstrate how symmetric and asymmetric timeliness contribute to the understatement of accounting net asset value. Second, I evaluate the extent to which symmetric and asymmetric timeliness are observable through their respective empirical estimates. I find that the extent to which symmetric timeliness and asymmetric timeliness meet the theoretical definition of conditional conservatism is dependent on the relative accumulations of economic gains and losses. Additionally, I find that asymmetric timeliness is only partially observable within the Basu (1997) Asymmetric Timeliness measure.
