On the Asymmetric Timeliness of Operating Cash Flows

I examine why operating cash flows exhibit asymmetric timeliness with respect to stock returns and given this understanding, address the consequences for research into conditional accounting conservatism. Numerous studies document that operating cash flows are more sensitive to negative stock returns relative to positive returns. Because the properties of cash flows are defined largely by the operating (rather than reporting) decisions taken by management, the asymmetric relation with returns cannot be explained by conditional conservatism. I find that the asymmetric timeliness of cash flows is primarily driven by product pricing, whereby managers are quick to cut prices in response to bad economic news, but do not appear to increase prices in response to good economic news. Consistent with this reasoning, I find that firms with greater pricing power exhibit lower asymmetric timeliness in operating cash flows as well as in earnings.Variation in the asymmetric timeliness of earnings induced by operating cash flows should not be interpreted as evidence of conditional conservatism. With this in mind, I revisit several existing inferences regarding conditional conservatism. I conclude that researchers should employ a specification of the Basu 1997 model that (1) avoids the confounding effect of cash flow asymmetry and (2) addresses the matching role of accruals