Consistent estimation of conditional conservatism

Abstract

In this paper, we propose an econometric model that presents three advantages in relation to the Basu model: (1) it is robust to the aggregation problem; that is, we prove that the Basu model produces inconsistent estimations of conditional conservatism and that this problem is solved with our proposal; (2) it can produce firm-specific measures of conservatism by using time-series; and (3) it completes the understanding of the intercept in the Basu model by breaking it down between unconditional conservatism and the reversion of the differences between market and book values of equity. In other words, we can provide firm-specific measures of both conditional and unconditional conservatism with the same model. We demonstrate all these theoretical assertions using simulated dataAccounting conservatism, Conditional conservatism, Unconditional conservatism, The Basu model, Aggregation effect