We find that Basu’s DT conservatism metric is significantly lower for test firms in periods of overstated earnings than
for control firms during the same periods. We also investigate whether estimated DT parameters indicate test firms’
earnings are significantly more conservative in post-overstatement periods than during periods of earnings over-
statements. Using both a cross-sectional design and a time-series design, we find that they are. Further, we test the
ability of the Khan and Watts (2009) C-Score metric to detect variation in conservatism. That metric is derived from the
Basu (1997) DT metric but has the advantage that it is estimated for individual companies and individual years. We find
that the C-Score is effective in detecting lower conservatism in the years of overstated earnings and higher conservatism
subsequent to overstatements.