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The Confounding Effects of Operating Cash Flow Asymmetric Timeliness on the Earnings-Based Measure of Conditional Conservatism

Xiaoli Tian, University of Iowa
Daniel W. Collins, University of Iowa
Paul Hribar , University of Iowa

ABSTRACT: The Basu measure captures both accrual and operating cash flow (CFO) asymmetric timeliness. We maintain that accrual asymmetric timeliness is more likely to capture accounting measurement system characteristics that are driven by external demands for conservative reporting, which is the object of interest in most empirical studies. CFO asymmetric timeliness, on the other hand, is more likely determined by firms’ fundamental operating characteristics. We show that variables associated with firms’ fundamental operating characteristics and life cycle stage -- size, age, growth, and capital expenditures -- explain cross sectional variation in CFO asymmetric timeliness. These results suggest that CFO asymmetric timeliness can confound the results in conditional conservatism studies. We show that this can hinder the ability of the earnings asymmetric timeliness measure to accurately reflect the degree of conservative versus non-conservative reporting.

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