Conservatism and the Ohlson Model

38 Pages Posted: 6 May 2010 Last revised: 4 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: June 2010


In this paper, we develop a framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. This affords a theoretical model of the signs and sizes of the valuation weights attached to book values, earnings and dividends as a function of conservatism. We proceed to generalize our model of conservatism and are able to show theoretically the likely numerical impact of conservatism on book values, price-earnings ratios and under valuations produced by residual income models. We investigate empirically the dependency of these valuation weights on conservatism using US data over the period 1963-2006 and find that they accord well with the theory developed. Finally, we explore the associated linear information dynamics and find strong evidence that the time-series properties of abnormal earnings are consistent with our model of accounting conservatism.

Keywords: Accounting conservatism, Equity valuation, Residual income models, Linear information dynamics

JEL Classification: M41

Suggested Citation

Ashton, David John and Wang, Pengguo, Conservatism and the Ohlson Model (June 2010). Available at SSRN: or

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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