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

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  • Xiao-Jun Zhang

    (University of California at Berkeley)

Abstract

This paper discusses Monahan’s empirical study of how conservative accounting of R&D affects the relations (i) between earnings and stock return; (ii) between estimates of value using the residual income valuation model and equity market value. My discussion focuses on the underlying mechanism of why growth matters and how the growth rate should be measured. In particular, I argue that different aspects of growth (e.g., short-term growth versus long-term growth) matter under different circumstances, depending on the intended use of accounting data. Failure to adjust for these differences affects the effectiveness of the empirical tests. The discussion also considers the impacts of potential noise in the R&D capitalization procedure and the presence of other intangible assets.

Suggested Citation

  • Xiao-Jun Zhang, 2005. "Discussion of “Conservatism, Growth and the Role of Accounting Numbers in Fundamental Analysis Process”," Review of Accounting Studies, Springer, vol. 10(2), pages 261-267, September.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:2:d:10.1007_s11142-005-1531-7
    DOI: 10.1007/s11142-005-1531-7
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-175, April.
    2. Greenball, Mn, 1969. "Appraising Alternative Methods Of Accounting For Accelerated Tax Depreciation - Relative-Accuracy Approach," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 7(2), pages 262-289.
    3. Martha L. Loudder & Bruce K. Behn, 1995. "Alternative Income Determination Rules and Earnings Usefulness: The Case of R&D Costs," Contemporary Accounting Research, John Wiley & Sons, vol. 12(1), pages 185-205, September.
    4. Zhang, Xiao-Jun, 2000. "Conservative accounting and equity valuation," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 125-149, February.
    5. Hirschey, M & Weygandt, Jj, 1985. "Amortization Policy For Advertising And Research And Development Expenditures," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 23(1), pages 326-335.
    6. Beaver, WH & Ryan, SG, 2000. "Biases and lags in book value and their effects on the ability of the book-to-market ratio to predict book return on equity," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38(1), pages 127-148.
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    Keywords

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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