The Link between Earnings Conservatism and the Price†to†Book Ratio*

Jinhan Pae, Daniel B. Thornton and Michael Welker

Contemporary Accounting Research, 2005, vol. 22, issue 3, 693-717

Abstract: We hypothesize and find that (1) earnings conservatism, the tendency of firms to recognize bad news in earnings on a more timely basis than good news, is substantially greater in portfolios of firms with lower price†to†book ratios than in portfolios of firms with higher price†to†book ratios; and (2) the negative association between earnings conservatism and the price†to†book ratio stems primarily from the accrual component of earnings, not the operating cash flow component of earnings. Our results suggest that studies using earnings†returns associations to investigate cross†sectional or time†series differences in earnings conservatism risk drawing erroneous inferences unless the research designs control for cross†sectional or time†series variation in price†to†book ratios.

Date: 2005
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://doi.org/10.1506/9FDN-N6ED-LJE9-A1HL

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:22:y:2005:i:3:p:693-717

Access Statistics for this article

More articles in Contemporary Accounting Research from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().