Publication: Consistent estimation of conditional conservatism
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2011-03
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Social Science Research Network
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Abstract
In this paper, we demonstrate analytically that Basu model estimates are affected by two
biases, except if very restrictive conditions are met: an aggregation bias produced by the
absence of the book-to-market ratio in Basu model, and (2) an aggregation problem
produced by the use of total market returns instead of separating the good news and bad
news of the period. To solve this problem, we propose an alternative econometric model
that is robust to both biases. The empirical results obtained using archival data
demonstrate the advantages of robustness of our alternative econometric model
compared to Basu model: it controls the omitted variable bias, is robust to the
aggregation effect, its estimates are less influenced by the extreme values of market
returns, and it presents a higher explanatory power.
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Keywords
Accounting conservatism, Consitional conservatism, Unconditional conservatism, Basu model, Aggregation effect, Omitted variable bias
Bibliographic citation
SSRN working paper series, march 2011