Basu's [The Conservatism Principle and the Asymmetric Timeliness of Earnings. Journal of Accounting and Economics 24 (1997): 3-37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, biases), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas' [More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism. The Accounting Review 86 (2011): 1765-1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility-related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo-dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism.

We study the effects of mandatory disclosure on competitive interactions in the setting of oil and gas (O&G) reserve disclosures by North American public firms. We document that reserve disclosures inform competitors: when one firm announces larger increases in O&G reserves, competitors experience lower announcement returns and higher real investments. To sharpen identification, we analyze several sources of cross-sectional variation in these patterns, the degree of competition, and the sign and the source of reserves changes. We also exploit two plausibly exogenous shocks: the tightening of the O&G reserve disclosure rules and the introduction of fracking technology. Additional tests more directly focused on the presence of proprietary costs confirm that the mandated reserve disclosures result in a relative loss of competitive edge for announcing firms. Our collective evidence highlights important trade-offs in the market-wide effects of disclosure regulation.

The question we address is whether mandated disclosure about dispersion of nonfinancial asset values can provide information relevant to assessing firm risk. Using a sample of Canadian oil and gas (O&G) firms between 2004 and 2011, we find that the difference between the disclosed 10th and 50th percentiles from the O&G reserves distribution, which measures dispersion of the distribution, is positively associated with future total and idiosyncratic equity return volatility, systematic risk, and credit risk. We also find that disclosure of increased reserves dispersion is associated with weaker stock price reactions to increases in reserves and with increases in bid-ask spreads, both of which indicate the disclosures convey information about risk associated with reserves. Additional tests reveal little evidence of managerial opportunism in the reserves disclosures. Taken together, our evidence suggests that quantitative disclosures about the dispersion of nonfinancial asset values can provide information relevant to assessing firm risk.

We exploit two regulatory shocks to examine the informational effects of tightening preexisting mandatory disclosure rules. Canadian National Instrument 51-101 in 2003 and the U.S. rule "Modernization of Oil and Gas Reporting" in 2009 introduced quasi-identical amendments which effectively tightened the rules governing oil and gas reserve disclosures in both countries. We document significant changes in firms' reporting outcomes when the new regulations are introduced. We also find that the reserve disclosures filed under the new regulations are more closely associated with stock price changes and with decreases in bid-ask spreads. Our findings are robust to controlling for other confounding factors such as time trends, other information disclosed simultaneously, financial reporting incentives, mispricing, and monitoring efforts.