Table 7 Comparison of conditional...

Table 7

Comparison of conditional conservatism measures for bankrupt firms partitioned by leverage levels and by tax cost levels (1987–2014)

Panel A: $X_{i t} / M V_{i t - 1} = β_{0} + β_{1} D_{i t} + β_{2} R_{i t} + β_{3} D_{i t} * R_{i t} + \sum Ψ_{t} Y e a r + ε_{i t}$
	Leverage				Taxation
	High level of leverage		Low level of leverage		High level of tax cost		Low level of tax cost
Variables	Coefficient	t-stat	Coefficient	t-stat	Coefficient	t-stat	Coefficient	t-stat
D (β₁)	−0.0110	−0.20	−0.0609	−1.45	−0.0645	−1.38	0.0151	0.32
R (β₂)	0.0101	0.16	0.00646	0.14	−0.0172	−0.24	0.0340	0.73
DR (β₃)	0.203*	1.81	0.0275	0.32	0.221*	1.95	0.0725	0.88
Constant	0.0952*	1.91	0.141***	3.80	0.168***	3.95	−0.170	−1.43
Year fixed effects	Yes		Yes		Yes		Yes
Observations	288		288		266		310
R²	0.137		0.128		0.134		0.075

Panel A: $X_{i t} / M V_{i t - 1} = β_{0} + β_{1} D_{i t} + β_{2} R_{i t} + β_{3} D_{i t} * R_{i t} + \sum Ψ_{t} Y e a r + ε_{i t}$
	Leverage				Taxation
	High level of leverage		Low level of leverage		High level of tax cost		Low level of tax cost
Variables	Coefficient	t-stat	Coefficient	t-stat	Coefficient	t-stat	Coefficient	t-stat
D (β₁)	−0.0110	−0.20	−0.0609	−1.45	−0.0645	−1.38	0.0151	0.32
R (β₂)	0.0101	0.16	0.00646	0.14	−0.0172	−0.24	0.0340	0.73
DR (β₃)	0.203*	1.81	0.0275	0.32	0.221*	1.95	0.0725	0.88
Constant	0.0952*	1.91	0.141***	3.80	0.168***	3.95	−0.170	−1.43
Year fixed effects	Yes		Yes		Yes		Yes
Observations	288		288		266		310
R²	0.137		0.128		0.134		0.075

Panel B: Other measures of conditional conservatism (C-score, conservatism and cumulative nonoperating accruals)
	Leverage				Taxation
Measure	Mean	t-stat	Median	WilcoxonZ	Mean	t-stat	Median	WilcoxonZ
C-score
High	0.3245	−12.77***	0.3495	−11.50***	0.2930	−5.76***	0.3072	−5.80***
Low	0.1887		0.1971		0.2254		0.2304
CR
High	0.4973	−0.95	0.4215	−0.184	0.4813	−0.01	0.4213	−0.25
Low	0.4649		0.4134		0.4809		0.4187
NOA
High	−0.1941	−2.67***	0	−2.42**	−0.2851	−0.96	0	0.63
Low	−0.4926		−0.0236		−0.3933		−0.0021

Panel B: Other measures of conditional conservatism (C-score, conservatism and cumulative nonoperating accruals)
	Leverage				Taxation
Measure	Mean	t-stat	Median	WilcoxonZ	Mean	t-stat	Median	WilcoxonZ
C-score
High	0.3245	−12.77***	0.3495	−11.50***	0.2930	−5.76***	0.3072	−5.80***
Low	0.1887		0.1971		0.2254		0.2304
CR
High	0.4973	−0.95	0.4215	−0.184	0.4813	−0.01	0.4213	−0.25
Low	0.4649		0.4134		0.4809		0.4187
NOA
High	−0.1941	−2.67***	0	−2.42**	−0.2851	−0.96	0	0.63
Low	−0.4926		−0.0236		−0.3933		−0.0021

Note(s): Table 7 reports results for the comparison of conditional conservatism measures for bankrupt firms for the sample period 1987–2014. Panel A presents OLS regression with year fixed effects within the bankrupt sample partitioned by the level of leverage and by the level of tax costs. The t-statistics are robust and adjusted for firm clustering. X_it/MV_it−1 is net income before extraordinary items (Compustat #18), scaled by lagged market value of equity (Compustat #125 * Compustat #199). R is the annual stock return from nine months before fiscal year-end of three months after fiscal year-end from CRSP. D_it = 1 if R_it < 0, and zero otherwise. ***p < 0.01, **p < 0.05, *p < 0.1. Year is a dummy variable for the fiscal year

Panel B presents a comparison of other conditional conservatism measures for bankrupt firms partitioned by leverage levels and by the level of tax costs for the sample period 1987–2014. C-score is the firm-year measure of conservatism as in Khan and Watts (2009); CR is the conservatism ratio measure of Callen et al. (2010) computed as the earnings surprise divided by earnings news. NOA is negative cumulative nonoperating accruals over the sample period deflated by beginning total assets, multiplied by negative one, as in Givoly and Hayn (2000). ***p < 0.01, **p < 0.05, *p < 0.1

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