Conservatism Measures that Control for the Effects of Economic Rents on Stock Returns

Posted: 11 Sep 2008 Last revised: 22 Aug 2014

See all articles by Judson Caskey

Judson Caskey

University of California, Los Angeles (UCLA) - Accounting Area

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business

Date Written: February 22, 2013

Abstract

Recent studies show that regression-based estimates of accounting conservatism reflect both differences in the asymmetric recognition of bad news and differences in asset composition. In particular, a firm’s market value and returns reflect both assets-in-place and expected future rents, while book values tend to reflect only assets-in-place. We propose two tests that remove the effect of asset composition on cross-sectional comparisons of accounting conservatism. First, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons of conservatism relative to overall news recognition. Second, in some cases, researchers can separately identify and make cross-sectional comparisons of the fraction of good news recognized and the fraction of bad news recognized. The estimates in this second scenario use a regression of earnings on returns interacted with a book-to-market ratio. We validate our model by deriving and testing several predictions based on it.

Keywords: Accounting conservatism, asymmetric timeliness, market-to-book ratio, returns-earnings relation

JEL Classification: M41, G10, G30, N20

Suggested Citation

Caskey, Judson and Peterson, Kyle, Conservatism Measures that Control for the Effects of Economic Rents on Stock Returns (February 22, 2013). Review of Quantitative Finance and Accounting, Vol. 42, No. 4, pp. 731-756, 2014, Available at SSRN: https://ssrn.com/abstract=1266787 or http://dx.doi.org/10.2139/ssrn.1266787

Judson Caskey (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://sites.google.com/site/judsoncaskey/

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

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