Cost Stickiness And Asymmetry Of Earnings Response—from Accounting Conservatism Perspective

In recent years,Chinese scholars have studied accounting conservatism from various perspectives.Most scholars have adopted the Basu model in empirical research,that is,using the incremental coefficient on negative returns in a piecewise linear regression of accounting income on contemporaneous stock return as the measure of the conditional conservatism.As Banker et al.(2016)incorporated the research on conservatism in financial accounting and the research on sticky costs in cost accounting into the same research framework,cost stickiness has been shown to be an important source of the asymmetry in reported earnings.As the existence of cost stickiness in Chinese listed companies has been confirmed by more and more scholars,accounting conservatism in China may no longer be the only explanation for the existence of timeliness differences in the response of accounting earnings to stock returns.Based on foreign and domestic studies on accounting conservatism and cost stickiness,this paper studies all the public companies in China from 2006-2014,and following the Basu(1997)model,the ABJ model,and the model proposed by Banker et al.(2016)that controls the cost stickiness factors,we build multivariate linear regression models to test the effect of cost stickiness on the asymmetric response of earnings to return in China.After adjusting data selection and variables to fit Chinese condition,we find that both accounting conservatism and cost stickiness lead to the asymmetry in reported earnings in China.Moreover,both types of asymmetry act in the same direction.Based on the study of Banker et al.(2016),this study verifies the effect of cost stickiness on the Basu model,and further tests the effect of cost stickiness on the extended models of the Basu model such as the C-Score model and the cumulative earnings-stock return model.Our findings enrich research on the effect of cost stickiness on the accounting conservatism models based on the asymmetric response of earnings.This paper suggests that scholars in China should consider the effect of cost stickiness on the asymmetry in reported earnings when using the Basu model and its extended models to study accounting conservatism.Controlling cost stickiness variables can remove the effect of cost stickiness and give more accurate measure of accounting conservatism.