income. Consequently, accounting income was found to have low timeliness and thus low value-relevance.
Other researchers (Beaver et al., 1980; Easton et al., 1992; Kothari and Sloan, 1992) looked further into the timeliness property of accounting income. They showed that the lag in accounting income behind economic income extended over multiple periods. The main reason is that the accounting recognition principles, such as revenue realization or expense matching, cause economic income to be incorporated into accounting income in a lagged and smoothed manner over time.
Basu (1997) improved the model significantly by adding another property of accounting income: conservatism. He interprets conservatism as the accountant’s tendency to require a higher degree of verification for recognizing good news than bad news in financial statements. Earnings, as a result, reflect bad news more quickly than good news, and this is called conservative asymmetry in accounting income timeliness. His model can be written as:
N I i t ¼ 0 þ 1 R D i t þ 2 R i t þ 3 R i t R D i t þ " i t
where RDit is a dummy variable equal to 1 if Rit < 0, 0 otherwise. Here, RDit is used as a proxy of good news versus bad news. It is possible to decompose the above-presented model into two linear models:
W h e n g o o d n e w s , R D i t i s e q u a l t o 0 ; t h e m o d e l i s N I i t ¼ 0 þ 2 R i t þ " i t
When bad news, RDit (2 þ 3)Rit þ "it
is equal to 1; the model is NIit ¼ 0 þ 1 þ
If R2 for bad news is higher than that for good news, earnings are timelier in the first case. Furthermore, a positive 3 means earnings are more sensitive concurrently to reporting publicly available bad news than good news. Basu (1997) showed that earnings’ sensitivity to current negative returns increased relative to earnings’ sensitivity to current positive returns over the period 1963-1990, consistent with accounting conservatism increasing over time. He attributed this to two factors: (1) the legal liability exposure of auditors and managers for tardy disclosure of bad news has increased significantly over the last three decades; and (2) contracting parties increasing their demand for conservatism.
3. Hypotheses General trends in the timeliness and conservatism of accounting income To analyze changes in the properties of accounting income published by French companies, it is important to understand the institutional context of France and recent developments in French accounting regulation and corporate financing methods.
Politicization of accounting standard-setting. Traditionally, establishing and enforcing national accounting standards has been the task of the French government. The first French chart of accounts was developed by the French Vichy administration under German occupation in 1942, and it has been the cornerstone of the French accounting system ever since. During the early post-war period, accounting standard- setting was still the Government’s responsibility for two main reasons: France’s wartime experience of national vulnerability created a determination that the state should have a greater say in the operation of the economy and performance of key sectors; at the time, France had very few professionally qualified accountants and an