Accounting Conservatism and Firm Value: 1994 – 2021

29 Pages Posted: 13 Aug 2023 Last revised: 24 Nov 2023

See all articles by Mahnaz Paydarzarnaghi

Mahnaz Paydarzarnaghi

University of Texas at Arlington

John David Diltz

Central Michigan University - Department of Finance and Law; University of Texas at Arlington

Salil K. Sarkar

University of Texas at Arlington - College of Business Administration

Date Written: February 23, 2022

Abstract

We explore the relationship between measures of accounting conservatism and firm value as measured by Tobin’s Q. It is generally regarded that accounting conservatism may have conflicting effects on firm value. On one hand, conservative accounting practices may reduce the probability of negative surprises, thus reducing informational asymmetries in contracting. On the other, conservative accounting practices may lead to a downward bias in firm valuation, making it more difficult for analysts to accurately forecast earnings. Controlling for a variety of confounding factors, we find that the relationship between accounting conservatism and firm value varies interestingly with time period and market sentiment. On balance our results suggest that the relationship between accounting conservatism and firm value can best be described as non-positive to weakly negative. An examination of the period around the Covid-19 pandemic using a difference-on-difference model suggests some softening of the potentially negative relationship between accounting conservatism and firm value. This research contributes to the extant literature by documenting dimensions of this important relationship that can only be explored in the context of a large panel dataset.

Keywords: Accounting conservatism, firm value, uncertainty, informational asymmetries

JEL Classification: M41, G32, G14

Suggested Citation

Paydarzarnaghi, Mahnaz and Diltz, John David and Sarkar, Salil K., Accounting Conservatism and Firm Value: 1994 – 2021 (February 23, 2022). Available at SSRN: https://ssrn.com/abstract=4539742 or http://dx.doi.org/10.2139/ssrn.4539742

Mahnaz Paydarzarnaghi (Contact Author)

University of Texas at Arlington ( email )

701 S. Nedderman Drive,
Arlington, TX 76019
United States

HOME PAGE: http://www.mahnazpaydar.com

John David Diltz

Central Michigan University - Department of Finance and Law ( email )

Mount Pleasant, MI 48859
United States

University of Texas at Arlington ( email )

Box 19449
Arlington, TX 76013
United States
817-272-3837 (Phone)

Salil K. Sarkar

University of Texas at Arlington - College of Business Administration ( email )

Arlington, TX
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
101
Abstract Views
375
Rank
502,616
PlumX Metrics