Co-movement of Price and Intrinsic Value - Does Accounting Information Matter?
52 Pages Posted: 21 Feb 2021
Date Written: December 14, 2020
We investigate the co-movement of stock prices and intrinsic value estimates focusing on the estimation of risk. We apply risk measurements based on a) market and b) accounting data. We ﬁnd that price and value co-move from 1983 to 2014 on an index-level using accounting-based risk measurement in contrast to the market-based risk measurement. Our ﬁndings have two vital implications. First, the lack of co-movement documented in prior research can alternatively be explained by the applied valuation model (market vs. accounting), rather than investors trading behavior (e.g., speculation). Second this result provides strong empirical evidence that accounting information is useful for equity investors. Finally, we analyze the role of accounting conservatism regarding co-movement. We document that on an index level conservative reporting harms the co-movement of price and value. However, conditioning on a co-movement of price and value, more conservatism is helpful for moving prices back to fundamentals.
Keywords: fundamental analysis; co-movement; risk measurement; accounting beta
JEL Classification: C32; G12; G14; M41
Suggested Citation: Suggested Citation