The Link Between Earnings Conservatism and the Price to Book Ratio
29 Pages Posted: 19 May 2005
There are 2 versions of this paper
The Link between Earnings Conservatism and the Price to Book Ratio
Abstract
We hypothesize and find: (1) Earnings conservatism, the tendency of firms to recognize bad news in earnings on a more timely basis than good news, is substantially greater in portfolios of firms with lower price-to-book ratios than in portfolios of firms with higher price-to-book ratios;(2) The negative association between earnings conservatism and the price-to-book ratio stems primarily from the accrual component of earnings, not the operating cash flow component of earnings. Our results suggest that studies using earnings-returns associations to investigate cross-sectional or time-series differences in earnings conservatism risk drawing erroneous inferences unless the research designs control for cross-sectional or time-series variation in price-to-book ratios.
Keywords: Accounting conservatism, earnings, accruals, returns, price-to-book
JEL Classification: M41, M44, G12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Effect of International Institutional Factors on Properties of Accounting Earnings
By Ray Ball, S.p. Kothari, ...
-
The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting
-
Conservatism in Accounting - Part I: Explanations and Implications
-
International Differences in the Timeliness, Conservatism and Classification of Earnings
By Peter F. Pope and Martin Walker
-
By Ray Ball, Ashok Robin, ...
-
Corporate Financial Statements, a Product of the Market and Political Processes
-
Conservatism in Accounting - Part Ii: Evidence and Research Opportunities
-
Earnings Quality in U.K. Private Firms
By Ray Ball and Lakshmanan Shivakumar