Accounting Conservatism and Transitory Earnings in Value and Growth Strategies
Norwegian School of Economics (NHH)
Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic
Journal of Business Finance & Accounting, Vol. 37, Issue 5-6, pp. 518-537, June/July 2010
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%. 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.
Number of Pages in PDF File: 20
Date posted: July 13, 2010