On the conditional conservatism measure: A robust estimation approach

Seil Kim, James Arvid Ohlson

Research output: Journal article publicationJournal articleAcademic researchpeer-review

3 Citations (Scopus)


Recent research, due to Patatoukas and Thomas (2011) and Ball, Kothari, and Nikolaev (2013), focuses on Basu's (1997) conditional conservatism measure and the existence of a denominator effect – whether the difference between the earnings-return coefficients of bad and good news firms (‘the Basu coefficient’) is only due to the beginning-of-year price deflator. We address this issue head-on by applying the Theil-Sen (TS) estimation method, which obtains the same coefficient estimate regardless of the chosen deflator and is robust to outliers. Results show the following: (i) the Basu coefficient remains positive using TS; (ii) the Basu coefficients using TS are similar to those using OLS without scaling but much smaller than shown by scaled OLS; (iii) the scaled OLS estimates appear to be influenced by a few outliers; and (iv) OLS estimates are more volatile due to estimation error. In sum, the denominator effect does not overturn Basu's hypothesis but the magnitude and variation of the Basu coefficient is much smaller than traditional results show.

Original languageEnglish
Pages (from-to)395-409
Number of pages15
JournalJournal of Business Finance and Accounting
Issue number3-4
Publication statusPublished - 1 Mar 2018


  • conditional conservatism
  • scale effects
  • Theil-Sen estimator

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance


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