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
Date Written: June 1, 2018
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: Suggested Citation