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Abstract:
Recent research concerned with enhancing conservatism corrections of linear information models (LIMs) reports a decrease in bias as compared to the Ohlson (1995) model. However, inaccuracy is not significantly reduced. These findings raise two questions: First, are LIMs able to capture unconditional conservatism? Second, if conservatism can be captured, then why is accuracy not markedly improved? With regard to the first question, we find that conservatism is captured when the Feltham/Ohlson (1995) model is estimated according to the modification suggested by Choi/O'Hanlon/Pope (2006). On average, one dollar of unrecorded reserves, measured as the estimated reserve by Penman/Zhang (2002), results in a correction of market value forecasts of approximately one dollar. Furthermore, our results suggest no improvement of the conservatism corrections for the following cases: (1) disaggregating book value into operating and financial assets and (2) estimating the Feltham/Ohlson (1995) model via the valuation function. Regarding the second question, we argue that the failure of the models to markedly reduce inaccuracy is the consequence of forcing the models to value different firms on the basis of the same conservatism coefficient. We therefore suggest an estimation procedure, in which LIM parameters are estimated separately for different conservatism levels. Our implementation reduces median inaccuracy from 36.8% to 21.1%, which is comparable to implementations of the residual income model based on analyst forecasts.

Accounting Conservatism, Residual Income Valuation, Feltham-Ohlson Model, Linear Information Model, Equity Valuation

Abstract:
We examine firm growth in the German SME-sector using a sample of companies obtained by a survey of two well known German SME networks - Arbeitsgemeinschaft selbstandiger Unternehmer (ASU) and Bundesverband Junger Unternehmer (BJU). On the basis of the law of proportionate growth (Gibrat's Law), a firm-growth model by Jovanovic (1982) as well as implications of the legal form and human capital theory we derive hypothesis on factors influencing firm growth. Our results show that growth is negatively related to firm size and age. We confirm that firms under limited liability display higher growth rates than firms under full liability. Besides, we find that the human capital of employees and the entrepreneur have a significant impact on growth.

employment growth, determinants of growth, small and medium-sized enterprises, Gibrat's law

Abstract:
We interpret cost stickiness, i.e., the manager's decision to bear the costs of unutilized resources when sales decline, as a risky project and examine its impact on conditional conservatism. We find that cost stickiness increases the asymmetric timeliness of earnings by weakening the timeliness of earnings for good news firms and, at the same time, intensifying the timeliness of earnings for bad news firms. Additionally, the results suggest that the asymmetric timeliness of earnings for cost sticky firms is more strongly driven through accounting factors, as reflected in accruals than through non-accounting factors, as reflected in cash flow. Our results imply that cost stickiness is more costly due to conditional conservatism and that the market separates the efficient from the inefficient cost sticky firms indicating that information asymmetry is low. Future research could test whether conditional conservatism helps mitigating the information asymmetry induced by cost stickiness.

Accounting Conservatism, Asymmetric Timeliness of Earnings, Basu (1997), Conditional Conservatism, Cost Stickiness

Abstract:
We provide evidence that conditional conservatism could be better captured in linear information models (LIMs), which largely rely on analysts' forecasts, if analysts would adjust their optimistic forecast for the asymmetric timeliness of earnings. Since adjusting the forecast requires information of the next period the adjusted model could be regarded as a benchmark to investigate conditional conservatism in LIMs. We demonstrate that for a joint parameter estimation of the Choi/O'Hanlon/Pope (2006) model based on adjusted forecasts valuation errors are reduced. For a market-to-book specific implementation the adjusted model improves valuation errors for the 30% highest conservative firms. Moreover, the adjustment reduces the asymmetric timeliness in the valuation error indicating that the adjusted model helps capturing conditional conservatism. Our results imply that LIMs will benefit from an adjustment for conditional conservatism particularly in the case of a joint parameter estimation and when concern is with high conservative firms.

Linear Information Model, Ohlson Model, Accounting Conservatism, Asymmetric Timeliness of Earnings, Basu (1997), Conditional Conservatism