Beaver, Lambert and Morse (1980) employ a regression of percentage change in prices on percentage change in earnings in which data are grouped by the dependent variable. Reverse regression offers a more intuitive and direct way to assess the information content of security prices, the objective of Beaver et al. While grouping is asymptotically equivalent, reverse regression is a more efficient way of examining the incremental explanatory power of lagged values of percentage change in price with respect to accounting earnings.

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.

Research finds that climate disasters have had minimal effects on banks’ performance to date, and it has devoted limited attention to how banks shape societal exposure to the disasters. This study addresses this puzzle and gap. Examining the share price reactions of banks affected by billion-dollar disasters from 1994–2024, we find that on average these banks lost market value around the disasters exceeding 10 percent of the estimated damages, with this percentage more than doubling during the sample period. We next show that banks’ county-level mortgage lending is positively associated with property exposures to disasters and FEMA appropriations when disasters occur. Finally, we show that banks open new branches in counties that experience growth in socially advantaged population, especially counties with high climate risks. Given accelerating climate change, property-casualty insurers backing away from climate-risky counties, and FEMA’s uncertain status, our evidence highlights growing climate-related costs for banks and society.

Prior research shows that during the pre-1990 bust financially weak banks managed income upward by delaying provisions for losses on heterogeneous loans. In contrast, we predict and find that during the 1990s boom profitable banks managed income downward by accelerating provisions for losses on homogeneous loans. Profitable banks obscured their income smoothing by accelerating charge-offs of homogeneous loans and by recording more gross charge-offs to offset recoveries of previously charged-off loans. Over the three years subsequent to the acceleration of charge-offs, they had higher and more persistent income before provisions for loan losses than other banks, consistent with income smoothing over a prolonged horizon.

We investigate two explanations for the declining contemporaneous linear relation between annual stock returns and accounting earnings over the past 30 years: (1) earnings increasingly reflect news with a lag relative to stock prices and (2) earnings increasingly reflect good and bad news in an asymmetric fashion. We hypothesize and find that annual earnings have a weaker association with current price changes and a stronger association with lagged price changes over time. We hypothesize and find that annual earnings reflect current positive price changes less strongly and current negative price changes more strongly over time. We also find that asymmetry with respect to lagged price changes is increasingly important over time. Strikingly, we find that, since the mid-1980s, the aggregation of earnings over a four-year window increasingly does less to reduce the importance of lags and asymmetry.

We examine the real effects of FAS 166 and FAS 167 on banks’ loan‐level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high‐risk mortgages on balance sheet.

We examine economic consequences of U.S. bank regulators' phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks' regulatory capital. We predict and find that, to mitigate regulatory capital volatility resulting from the filter removal, advanced approaches banks increased the proportion of investment securities classified as held-to-maturity, thereby limiting their financing and interest rate risk management options, and they decreased securities risk, thereby reducing their interest rate spread. We further predict and find that these banks borrow more under securities repurchase agreements potentially collateralized by held-to-maturity securities and reduce loan supply owing to their reduced financing options, and that they increase loan risk to mitigate the decrease in their interest rate spread. JEL Classifications: G21; G28; M41; M48. Data Availability: Data are available from the public sources cited in the text.