Abstract

http://ssrn.com/abstract=201048
 
 

References (13)



 
 

Citations (134)



 
 

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Accounting Conservatism, the Quality of Earnings, and Stock Returns


Stephen H. Penman


Columbia University - Department of Accounting

Xiao-Jun Zhang


University of California, Berkeley; China Academy of Financial Research (CAFR)

December 1999


Abstract:     
Quality of earnings questions arise when firms that practice conservative accounting change the level of their investment in net operating assets: increases in net operating assets create "hidden reserves," depressing earnings, and decreases in investment release hidden reserves into earnings. This paper develops diagnostics that capture this joint effect of investment and conservative accounting and finds that the diagnostics forecast differences in future return on net operating assets from the current return on net operating assets. Moreover, the diagnostics forecast stock returns, indicating that the stock market does not appreciate how conservatism and investment combine to raise quality questions about reported earnings.

Number of Pages in PDF File: 39

JEL Classification: M41, G12, G14

working papers series


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Date posted: January 23, 2000  

Suggested Citation

Penman, Stephen H. and Zhang, Xiao-Jun, Accounting Conservatism, the Quality of Earnings, and Stock Returns (December 1999). Available at SSRN: http://ssrn.com/abstract=201048 or http://dx.doi.org/10.2139/ssrn.201048

Contact Information

Stephen H. Penman (Contact Author)
Columbia University - Department of Accounting ( email )
3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Xiao-Jun Zhang
University of California, Berkeley ( email )
545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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References:  13
Citations:  134
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