Direction of Sales Change and Asymmetric Timeliness of Earnings

• In Event: Asymmetric Timeliness of Recognition

Abstract

Sales decreases affect earnings more than sales increases because of cost stickiness. We hypothesize that this correlated omitted variable constitutes a confounding effect in standard conservatism models. Adding sales change direction to the Basu (1997) and Khan and Watts (2009) models decreases measured conservatism significantly. We also document an interaction effect of sales change direction on conservatism that likely arises because sales decreases provide incremental information in impairment tests. We propose a Modified CScore that accounts for both effects of sales change direction, and demonstrate that it improves on the Khan-Watts CScore in accurately capturing variation in conservatism.

Authors

• Rajiv D Banker, Temple University

• Sudipta Basu, Temple University

• Dmitri Byzalov, Temple University

• Yun-Sheng Chen, Temple University