Valuation and Conservatism

36 Pages Posted: 6 May 2010 Last revised: 7 Jun 2010

See all articles by David J. Ashton

David J. Ashton

University of Bristol - Department of Economics

Pengguo Wang

Xfi, University of Exeter

Date Written: January 2010

Abstract

Residual income models provide an important theoretical link between equity valuation and financial statement variables. While various researchers have developed models of how accounting policy impacts on the structure of these models, empirical support for these models is at best weak and frequently contradictory. In this paper, we develop a general model, which identifies the dependency between valuation parameters in residual income models and the associated structure of earnings information dynamics and accounting conservatism. We test these models by relating the parameters of residual income models to two measures of conservatism, the conventional measure of price-to-book ratio and the recent measure of a C-Score index developed by Khan and Watts (2009) and find that the empirical results accord well with our theoretical predictions.

JEL Classification: M41

Suggested Citation

Ashton, David John and Wang, Pengguo, Valuation and Conservatism (January 2010). Available at SSRN: https://ssrn.com/abstract=1600818 or http://dx.doi.org/10.2139/ssrn.1600818

David John Ashton

University of Bristol - Department of Economics ( email )

8 Woodland Road
Bristol BS8 ITN
United Kingdom
+44 (0)117 928 8423 (Phone)

Pengguo Wang (Contact Author)

Xfi, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

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