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The Role of Accounting Conservatism in the Decreasing Book Equity of U.S. Firms

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Listed:
  • Haowen Luo

    (Doermer School of Business, Purdue University Fort Wayne, 2101 E. Coliseum Blvd, Neff Hall 350C, Fort Wayne, IN 46805, USA)

  • Bing Luo

    (Lam Family College of Business, San Francisco State University, 1600 Holloway Ave., San Francisco, CA 94132, USA)

  • S. Drew Peabody

    (Martha and Spencer Love School of Business, Elon University, 2075 Campus Box, Elon, NC 27244, USA)

Abstract

We offer a novel explanation for the widespread decline in U.S. firms’ reported book equity. We find that accounting conservatism is negatively associated with book equity, a result that is both economically and statistically significant, as well as robust to a variety of model specifications. Our findings suggest that the rise in accounting conservatism has significantly contributed to the declines in book equity over the decades.

Suggested Citation

  • Haowen Luo & Bing Luo & S. Drew Peabody, 2025. "The Role of Accounting Conservatism in the Decreasing Book Equity of U.S. Firms," IJFS, MDPI, vol. 13(3), pages 1-30, August.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:3:p:146-:d:1727216
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    References listed on IDEAS

    as
    1. Scott B. Jackson & Xiaotao (Kelvin) Liu, 2010. "The Allowance for Uncollectible Accounts, Conservatism, and Earnings Management," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(3), pages 565-601, June.
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    3. Hyuna Park, 2019. "Intangible assets and the book‐to‐market effect," European Financial Management, European Financial Management Association, vol. 25(1), pages 207-236, January.
    4. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    5. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    6. Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LLC, vol. 4(3), pages 290-311, September.
    7. Ray Ball & Lakshmanan Shivakumar, 2006. "The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 44(2), pages 207-242, May.
    8. Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2013. "The benefits of conservative accounting to shareholders: Evidence from the financial crisis," Bank of Finland Research Discussion Papers 8/2013, Bank of Finland.
    9. Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2013. "The benefits of conservative accounting to shareholders : Evidence from the financial crisis," Research Discussion Papers 8/2013, Bank of Finland.
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