Connecting Book Rate of Return to Risk and Return: The Information Conveyed by Conservative Accounting

59 Pages Posted: 1 Mar 2014 Last revised: 12 Jun 2018

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia Business School - Department of Accounting

Xiao-Jun Zhang

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

Date Written: June 1, 2018

Abstract

ABSTRACT. This paper investigates how the book rate of return relates to risk and the expected return for equity investing and documents the role of conservative accounting in making the connection. In contrast to asset pricing research where the book rate of return is viewed as positively associated with risk and expected stock returns, the paper demonstrates the opposite: With the effect of conservative accounting, a lower book rate of return indicates higher risk and a higher expected return. The empirical analysis indicates that the market prices equities accordingly.

Keywords: book rate of return, conservative accounting, risk and return

JEL Classification: G12, M41

Suggested Citation

Penman, Stephen H. and Zhang, Xiao-Jun, Connecting Book Rate of Return to Risk and Return: The Information Conveyed by Conservative Accounting (June 1, 2018). Columbia Business School Research Paper No. 14-21. Available at SSRN: https://ssrn.com/abstract=2402933 or http://dx.doi.org/10.2139/ssrn.2402933

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Xiao-Jun Zhang

University of California, Berkeley - Accounting Group ( email )

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

China Academy of Financial Research (CAFR)

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Shanghai P.R.China, 200030
China

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