Does asymmetric cost behaviour impact conditional conservatism practices? A quantile regression approach

Document Type

Article

Publication Date

Summer 7-1-2024

Abstract

This study examines the asymmetric cost behaviour at different levels of activity, and its impact on the accuracy of predicting and understanding earnings patterns. Furthermore, it provides additional empirical evidence regarding the timeliness of earnings, specifically focusing on conditional conservatism, within the context of an emerging economy, Egypt. To address the limitations in previous studies relied on traditional ordinary least squares regression models, this study implements a quantile regression model. This model provides a framework to test the study hypotheses across various scenarios, encompassing different levels of costs and earnings for diverse firms. The sample consists of 164 publicly listed firms during the period from 2017 to 2022(984 observation). The study findings suggest that Egyptian-listed firms besides conditional conservatism commonly exhibit asymmetric cost behaviour, as evidenced by the stickiness of their operating costs during the study period. The degree of asymmetric cost behaviour is greater for firms with low changes in activity levels compared to firms with higher changes in activity levels. The study findings remain statistically significant even with accounting for the influence of industry and year-specific factors. Findings also remain robust with operating accruals be the dependent variable. This study contributes to the existing financial accounting literature by presenting empirical evidence that emphasises the significance of understanding cost behaviour for accurately predicting and understanding the asymmetric timeliness of earnings. Additionally, this study is one of the first to examine the association between asymmetric cost behaviour and the asymmetric timeliness of earnings using a quantile regression approach.

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