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Accounting Conservatism and Transitory Earnings in Value and Growth Strategies

20 Pages Posted: 13 Jul 2010  

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: 2009-09

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%. 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.

Suggested Citation

Hamberg, Mattias and Novak, Jiri, Accounting Conservatism and Transitory Earnings in Value and Growth Strategies (2009-09). Journal of Business Finance & Accounting, Vol. 37, Issue 5-6, pp. 518-537, June/July 2010. Available at SSRN: https://ssrn.com/abstract=1639215 or http://dx.doi.org/10.1111/j.1468-5957.2010.02186.x

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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