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

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  • Steven J. Monahan

    (INSEAD)

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.

Suggested Citation

  • Steven J. Monahan, 2005. "Conservatism, Growth and the Role of Accounting Numbers in the Fundamental Analysis Process," Review of Accounting Studies, Springer, vol. 10(2), pages 227-260, September.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:2:d:10.1007_s11142-005-1530-8
    DOI: 10.1007/s11142-005-1530-8
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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