Table A1 The operational definition of... | Emerald Publishing

Table A1

The operational definition of variables

No.	Variable	Type	Definition
1	Conditional conservatism	Dependent	One of the dependent variables in this study is conditional conservatism, which is assessed using Basu’s (1997) conservatism model. In this model, positive returns signify positive news, while negative returns indicate negative news. Basu’s model posits that earnings respond more promptly to negative than positive news. The model is as follows: ${NI}_{it} = β_{0} + β_{1} D_{i, t} + β_{2} R_{i, t} + β_{3} D_{i, t} R_{i, t} + Ɛ_{i, t}$ Where: NI_i,t: the company’s accounting net income in year t to the equity market value at the end of the year (the beginning of year t). D_i,t: a dummy variable that equals 1 if there is bad news and 0 otherwise. In this model, if β₃ $> 0$ ⁠, it shows the degree of conservatism, which is calculated separately for each firm and year. (β₃+ β₂) is the reaction of earnings to bad news, and because (β₃+ β₂) is greater than β₂, then β₃ is positive, and in fact, it is the earnings asymmetric timeliness coefficient, which is the measure of conservatism. And β₂ is the reaction of earnings to good news. R_i,t: the stock return in year t, which is defined as the difference between the stock price at the end of the period and the stock price at the beginning of the period plus adjustments (such as including dividends, bonus shares, etc.) divided by the stock price at the begging of the period
2	Unconditional conservatism	Dependent	According to Ryan (2006) and Beaver and Ryan (2000), the paramount measure of unconditional conservatism is the market-to-book value ratio. They contend that costs such as research and development and advertising, when expensed rather than capitalized, do not find representation in book values. At the same time, the market assigns a value to these expenses. Consequently, the application of unconditional conservatism creates a disparity between market and book values, leading to a higher market-to-book value ratio. Thus, the MTB measure, denoting the market-to-book ratio, is chosen as the gauge of unconditional conservatism MTB: the market-to-book ratio of equity
3	Comparability	Independent	The model developed by De Franco, Kothari and Verdi (2011) is employed to assess financial statement comparability, with the accounting outputs of companies serving as the basis for evaluating the comparability of their financial figures. When the accounting systems of two companies are similar, the reported accounting results tend to be alike. In this study, following the approach of De Franco, Kothari and Verdi (2011) and Kim et al. (2016), economic events and accounting outputs (figures) are measured using the companies' stock returns and earnings, respectively. Financial statement comparability is calculated for each firm-year observation, and the estimation of parameters βi and αi for the most recent 12 quarters of firm i in year t is conducted using the regression equation presented below: ${Earnings}_{it} = α_{i} + β_{i} {Return}_{it} + Ɛ_{it}$ Earnings_it: the adjusted quarterly net earnings to the market value of equity at the beginning of the period for firm i and year t. Return_it: the quarterly stock return for firm i and year t. α_i,β_i: the estimated coefficients of the accounting function for firm i. Likewise, this procedure is reiterated to estimate the parameters αj and βj for firm j in year t. When employing the quarterly stock return of firm i in year t within both accounting systems, the projected earnings for both firms i and j, corresponding to the same economic events (i.e., the quarterly stock return of firm i in year t), are determined through the following regression equations. Essentially, the proximity of accounting functions between two companies serves as an indicator of comparability between them. To quantify the disparity between the accounting functions of firms i and j the anticipated earnings of the two companies are calculated using the following models: ${E (E a r n i n g s)}_{i i t} = α_{i} + β_{i} {R e t u r n}_{i t} + Ɛ_{i t}$ ${E (E a r n i n g s)}_{i j t} = α_{j} + β_{j} {R e t u r n}_{i t} + Ɛ_{i t}$ E(Earnings) _iit: the predicted earnings of firm i considering the function of firm i and the return of firm i in year t. E(Earnings) _ijt: the predicted earnings of firm j considering the function of firm j and the return of firm i in year t. Finally, the accounting comparability between firms i and j is defined as follows: ${C o m p A c c t}_{i j t} = - (\frac{1}{12}) \times \sum_{t - 11}^{t} \| E {(E a r n i n g s)}_{i i t -} {E (E a r n i n g s)}_{i j t} \|$ CompAcct_ijt: the comparability of accounting figures between firms i and j, whose greater value shows higher comparability. Then, to determine the firm-year comparability measure for each firm i, all the values of CompAcct_ijt are sorted from the greatest to the lowest. Then, the mean of CompAcct_ijt for the four firms j with the highest comparability to firm i in year t is calculated as the comparability measure for firm i, which is used as the variable M4-CompAcct_it in the model
4	Size	Control	Firm size is defined as the logarithm of total assets at the end of the fiscal year. According to Yuliarti and Yanto (2017), we control for the firm size effect on the level of accounting conservatism
5	ROA	Control	Return on assets is calculated by dividing operating income by total assets. ROA and sales are added to control profitability’s impact on the conservatism level, as suggested by Khalilov and Osma (2020)
6	Lev	Control	Financial leverage represents the ratio of total debts to total assets. This variable is also employed to control for the impact of indebtedness on conservatism (Dang and Tran, 2020) Sales: Sales growth is calculated as the difference between the current year’s and the previous year’s sales, divided by the previous year’s sales
7	CfO	Control	Operating cash flow is the firm’s operating cash flow in a given year. This variable is added to control the impact of operation cash flow on accounting conservatism (Martani and Dini, 2010)
8	Busy	Control	This variable takes the value 1 if the fiscal year ends on the 29th Esfand, and 0 otherwise Industry: A dummy variable representing the industry
9	Year	Control	A dummy variable indicating the year

No.	Variable	Type	Definition
1	Conditional conservatism	Dependent	One of the dependent variables in this study is conditional conservatism, which is assessed using Basu’s (1997) conservatism model. In this model, positive returns signify positive news, while negative returns indicate negative news. Basu’s model posits that earnings respond more promptly to negative than positive news. The model is as follows: ${NI}_{it} = β_{0} + β_{1} D_{i, t} + β_{2} R_{i, t} + β_{3} D_{i, t} R_{i, t} + Ɛ_{i, t}$ Where: NI_i,t: the company’s accounting net income in year t to the equity market value at the end of the year (the beginning of year t). D_i,t: a dummy variable that equals 1 if there is bad news and 0 otherwise. In this model, if β₃ $> 0$ , it shows the degree of conservatism, which is calculated separately for each firm and year. (β₃+ β₂) is the reaction of earnings to bad news, and because (β₃+ β₂) is greater than β₂, then β₃ is positive, and in fact, it is the earnings asymmetric timeliness coefficient, which is the measure of conservatism. And β₂ is the reaction of earnings to good news. R_i,t: the stock return in year t, which is defined as the difference between the stock price at the end of the period and the stock price at the beginning of the period plus adjustments (such as including dividends, bonus shares, etc.) divided by the stock price at the begging of the period
2	Unconditional conservatism	Dependent	According to Ryan (2006) and Beaver and Ryan (2000), the paramount measure of unconditional conservatism is the market-to-book value ratio. They contend that costs such as research and development and advertising, when expensed rather than capitalized, do not find representation in book values. At the same time, the market assigns a value to these expenses. Consequently, the application of unconditional conservatism creates a disparity between market and book values, leading to a higher market-to-book value ratio. Thus, the MTB measure, denoting the market-to-book ratio, is chosen as the gauge of unconditional conservatismMTB: the market-to-book ratio of equity
3	Comparability	Independent	The model developed by De Franco, Kothari and Verdi (2011) is employed to assess financial statement comparability, with the accounting outputs of companies serving as the basis for evaluating the comparability of their financial figures. When the accounting systems of two companies are similar, the reported accounting results tend to be alike. In this study, following the approach of De Franco, Kothari and Verdi (2011) and Kim et al. (2016), economic events and accounting outputs (figures) are measured using the companies' stock returns and earnings, respectively. Financial statement comparability is calculated for each firm-year observation, and the estimation of parameters βi and αi for the most recent 12 quarters of firm i in year t is conducted using the regression equation presented below: ${Earnings}_{it} = α_{i} + β_{i} {Return}_{it} + Ɛ_{it}$ Earnings_it: the adjusted quarterly net earnings to the market value of equity at the beginning of the period for firm i and year t. Return_it: the quarterly stock return for firm i and year t. α_i,β_i: the estimated coefficients of the accounting function for firm i. Likewise, this procedure is reiterated to estimate the parameters αj and βj for firm j in year t. When employing the quarterly stock return of firm i in year t within both accounting systems, the projected earnings for both firms i and j, corresponding to the same economic events (i.e., the quarterly stock return of firm i in year t), are determined through the following regression equations. Essentially, the proximity of accounting functions between two companies serves as an indicator of comparability between them. To quantify the disparity between the accounting functions of firms i and j the anticipated earnings of the two companies are calculated using the following models: ${E (E a r n i n g s)}_{i i t} = α_{i} + β_{i} {R e t u r n}_{i t} + Ɛ_{i t}$ ${E (E a r n i n g s)}_{i j t} = α_{j} + β_{j} {R e t u r n}_{i t} + Ɛ_{i t}$ E(Earnings) _iit: the predicted earnings of firm i considering the function of firm i and the return of firm i in year t. E(Earnings) _ijt: the predicted earnings of firm j considering the function of firm j and the return of firm i in year t. Finally, the accounting comparability between firms i and j is defined as follows: ${C o m p A c c t}_{i j t} = - (\frac{1}{12}) \times \sum_{t - 11}^{t} \| E {(E a r n i n g s)}_{i i t -} {E (E a r n i n g s)}_{i j t} \|$ CompAcct_ijt: the comparability of accounting figures between firms i and j, whose greater value shows higher comparability. Then, to determine the firm-year comparability measure for each firm i, all the values of CompAcct_ijt are sorted from the greatest to the lowest. Then, the mean of CompAcct_ijt for the four firms j with the highest comparability to firm i in year t is calculated as the comparability measure for firm i, which is used as the variable M4-CompAcct_it in the model
4	Size	Control	Firm size is defined as the logarithm of total assets at the end of the fiscal year. According to Yuliarti and Yanto (2017), we control for the firm size effect on the level of accounting conservatism
5	ROA	Control	Return on assets is calculated by dividing operating income by total assets. ROA and sales are added to control profitability’s impact on the conservatism level, as suggested by Khalilov and Osma (2020)
6	Lev	Control	Financial leverage represents the ratio of total debts to total assets. This variable is also employed to control for the impact of indebtedness on conservatism (Dang and Tran, 2020)Sales: Sales growth is calculated as the difference between the current year’s and the previous year’s sales, divided by the previous year’s sales
7	CfO	Control	Operating cash flow is the firm’s operating cash flow in a given year. This variable is added to control the impact of operation cash flow on accounting conservatism (Martani and Dini, 2010)
8	Busy	Control	This variable takes the value 1 if the fiscal year ends on the 29th Esfand, and 0 otherwiseIndustry: A dummy variable representing the industry
9	Year	Control	A dummy variable indicating the year

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