summary and critical discussion of the article: Basu, Sudipta (1997): The conservatism principl

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TABLE OF CONTENT
List of abbreviations AND SYMBOLS II
1. Introduction 1
2. The conservatism principle and the asymmetric timeliness of earnings – a summary 2
2.1. The author’s motivation 2
2.2. The asymmetric sensitivity of earnings to returns 2
2.3. Earnings-return association versus cash flow-return association 5
2.4. The asymmetric persistence of earnings changes conditional on news 7
2.5. Conservatism and the asymmetric effect on the earnings response coeffcients 9
2.6 Further testing 11
3. International differences in the effects of asymmetric timeliness on earnings 11
3.1 Common-law versus code-law countries 11
3.1.1 Classification-differences of bad news as a bias to measured conservatism 13
4. Conservatism and its impact on
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During my research I came across the deliniation of unconditional versus conditional conservatism in recent literature, which I incorporated in my context-related discussion. In the last two paragraphs of chapter four I oppose non-contracting situations to contracting situations concerning their respective benefits to earnings quality. In the end I conclude my seminar paper with a wholistic assessment of all chapters.

2. The conservatism principle and the asymmetric timeliness of earnings – a summary
2.1. The author’s motivation
In the underlying paper the author re-examines the conservatism principle and its asymmetric effects on earnings. With samples consisting of all firm-year observations from 1963 to 1990 with returns data on the CRSP NYSE/AMEX Monthly files and respective accounting data on the COMPUSTAT Annual Industrial and Research files, he formulates and tests four major hypotheses to find evidence for his predictions. At first he chracterizes “conservatism in accounting as the more timely recognition in earnings of bad news regarding future cash flows than good news”.1 In his first hypothesis he predicts a more sensitive response of earnings towards bad news in comparison to good news, proxied by negative and positve annual stock returns. His second prediction is that earnings are more timely than cash flow, indicating a stronger association of accruals to conservative accounting effects. Hypotheses three and four account for a test on the

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