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

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  • Judson Caskey
  • Kyle Peterson

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

Suggested Citation

  • Judson Caskey & Kyle Peterson, 2014. "Conservatism measures that control for the effects of economic rents on stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 731-756, May.
    • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:4:p:731-756
    DOI: 10.1007/s11156-013-0360-1
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    Cited by:

    1. Xiaoli Wang & Michael S. Long & Ren Raw Chen & Jingfeng Zhang, 2016. "Economic growth potential creating a real put and the resulting valuation of the firm," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 453-474, October.
    2. Tri Tri Nguyen & Chau Minh Duong & Nguyet Thi Minh Nguyen & Hung Quang Bui, 2020. "Accounting conservatism and banking expertise on board of directors," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 501-539, August.

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    More about this item

    Keywords

    Accounting conservatism; Asymmetric timeliness; Book-to-market ratio; Returns-earnings relation; M41; G10; G30; N20;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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