Conservatism measures that control for the effects of economic rents on stock returns

Judson Caskey and Kyle Peterson ()

Review of Quantitative Finance and Accounting, 2014, vol. 42, issue 4, 756 pages

Abstract: Recent studies show that regression-based estimates of accounting conservatism reflect both differences in the asymmetric recognition of bad news and differences in asset composition. In particular, a firm’s market value and returns reflect both assets-in-place and expected future rents, while book values tend to reflect only assets-in-place. We propose two tests that remove the effect of asset composition on cross-sectional comparisons of accounting conservatism. First, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons of conservatism relative to overall news recognition. Second, in some cases, researchers can separately identify and make cross-sectional comparisons of the fraction of good news recognized and the fraction of bad news recognized. The estimates in this second scenario use a regression of earnings on returns interacted with a book-to-market ratio. We validate our model by deriving and testing several predictions based on it. Copyright Springer Science+Business Media New York 2014

Keywords: Accounting conservatism; Asymmetric timeliness; Book-to-market ratio; Returns-earnings relation; M41; G10; G30; N20 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-013-0360-1

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