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The Effect of Accounting Conservatism on Equity Valuation: Evidence from Corporate Life Cycle

Author

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  • Yi-Mien Lin
  • Chia-Hua Chang
  • Yuh-Jiuan Parng

Abstract

This study examines the effects of accounting conservatism on equity mispricing. We adopt Basu’s and Khan and Watt’s C_Score models to measure accounting conservatism and use EBO and RKRV valuation models to calculate a stock’s intrinsic value. Additionally, we consider the effects of the corporate life cycle on the above relationship. The findings show that investors would make more positive valuations if a company has a high accounting conservatism in the previous period. Second, accounting conservatism has a deferred and positive effect on equity valuation. Third, the equity value of a company at the growth stage tends to be overvalued, while that of a company in maturity stage is likely to be undervalued. Finally, accounting quality impacts equity valuations, i.e. the better, then the less undervalued it is. Overall, we provide the evidences that accounting conservatism does matter to equity valuation, especially with the change of corporate life cycle. JEL classification numbers: G14, G32

Suggested Citation

  • Yi-Mien Lin & Chia-Hua Chang & Yuh-Jiuan Parng, 2019. "The Effect of Accounting Conservatism on Equity Valuation: Evidence from Corporate Life Cycle," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 9(1), pages 1-1.
    • Handle: RePEc:spt:apfiba:v:9:y:2019:i:1:f:9_1_1
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    References listed on IDEAS

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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