Conservative Accounting and Equity Valuation

Posted: 10 Nov 2000

See all articles by Xiao-Jun Zhang

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

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Abstract

This paper examines how conservative accounting affects the relation between accounting data and firm value. The analysis shows that conservative accounting can be characterized equivalently in terms of book value, earnings, or book rate of return. Furthermore, capitalized earnings generally provide a less biased estimate of equity value than book value does. In addition, firm growth affects the way earnings and book value are combined in valuation. A weighted average of book value and capitalized earnings, with the weight on earnings being an increasing and convex function of growth, yields an asymptotically unbiased estimate of equity value. When growth is positive, the weight on book value is negative.

JEL Classification: M41, M44, G12

Suggested Citation

Zhang, Xiao-Jun, Conservative Accounting and Equity Valuation. Journal of Accounting & Economics, Vol 29, No 2, April 2000, Available at SSRN: https://ssrn.com/abstract=237932

Xiao-Jun Zhang (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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