This paper investigates the complementary effects of conditional conservatism and liquidation option on asymmetric earnings persistence and value relevance of earnings. This paper also explores that curtailments used as a proxy for liquidation option could be a correlated omitted variable of Basu’s(1997) asymmetric timeliness model.
The empirical analysis is performed for 8,291 non-banking firm-year sample that listed on Korean Stock Exchange(KSE) and Korean Securities Dealers Automated Quotation(KOSDAQ) market over the period of 2010-2015.
Main findings can be summarized as follows. First, we find losses are less persistent and value relevant than profits. Second, we find conditional conservatism and curtailments are the factors contributing to asymmetric earnings persistence and value relevance. Third, we find conditional conservatism and curtailments serve as complementary factors being able to explain asymmetric earnings persistence and value relevance. Finally, we confirm that curtailment is an important correlated omitted variable to alleviate Basu’s(1997) asymmetric timeliness model suffering from the problems of estimation bias and model specification.
This paper is expected to contribute to propose a complementary relation of the conditional conservatism from the enterprise external factor and liquidation option from the internal factor for explaining the asymmetric earnings persistence and value relevance. Next, we present the internal factor or real choice, such as curtailments, give alternative explanations for asymmetries. These results are enhances understanding for quality of earnings and value relevance.
Lastly, our results are suggested an alternative that the role of liquidation option as important correlated omitted variable at Basu’s(1997) measures of conditional conservatism and timely loss recognition, and therefore this study to fix a problem that conditional conservatism that using Basu’s(1997) asymmetric timeliness model have the bias.