Conservatism, Growth and the Role of Accounting Numbers in the Fundamental Analysis Process

Steven J. Monahan ()
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Steven J. Monahan: INSEAD

Review of Accounting Studies, 2005, vol. 10, issue 2, No 6, 227-260

Abstract: Abstract I evaluate the effects of conservative accounting for research and development (R&D) and past growth in R&D on: (1) the relation between aggregate earnings (deflated by price) and contemporaneous stock return, and (2) the association between estimates of value derived from the residual income valuation model (i.e., RIV estimates) and equity market value. I show that the conservative treatment of R&D affects the earnings/return relation only for firms that experience high growth in R&D during the return interval of interest. I also demonstrate that the effect of conservative accounting for R&D on the association between RIV estimates and equity market values is increasing in past growth in R&D.

Keywords: conservatism; growth; fundamental analysis; research and development (search for similar items in EconPapers)
JEL-codes: C22 G12 M41 (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11142-005-1530-8

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