Accounting Conservatism and Transitory Earnings in Value and Growth Strategies

Journal of Business Finance & Accounting, Forthcoming

Posted: 13 Dec 2009

See all articles by Mattias Hamberg

Mattias Hamberg

Norwegian School of Economics (NHH)

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2009

Abstract

The value premium earned on value and growth investment strategies increases after adjusting for transitory earnings and for the accounting conservatism bias in the book value of equity. Simple investment strategies based on earnings-to-price (E/P) and book-to-market (B/M) performed on the Swedish stock market between 1980 and 2004 generate an annual value premium of 11 to 14 percent. Adjustments for transitory earnings and for the conservatism bias increase the value premium by 2 to 4 percentage points, and at the same time they improve the consistency of earning it. These results suggest that transitory earnings and accounting conservatism introduce noise into E/P and B/M measures. Adjusting for these accounting characteristics makes the identification based on E/P and B/M more effective.

Keywords: market efficiency, value strategy, growth strategy, earnings-to-price, book-to-market, transitory earnings, accounting conservatism

JEL Classification: G14

Suggested Citation

Hamberg, Mattias and Novak, Jiri, Accounting Conservatism and Transitory Earnings in Value and Growth Strategies (December 3, 2009). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1517805

Mattias Hamberg (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

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