Accounting Conservatism, Earnings Persistence, and Pricing Multiples on Earnings

51 Pages Posted: 21 Feb 2007 Last revised: 22 May 2014

See all articles by Lucy Huajing Chen

Lucy Huajing Chen

Villanova University

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems

Wonsun Paek

Sungkyunkwan University

Heibatollah Sami

Lehigh University

Date Written: November 6, 2013

Abstract

We examine the effect of accounting conservatism on earnings persistence and the stock market’s valuation of earnings. Using a sample of U.S. companies during the period of 1988-2010, we find that firms with more conservative accounting generate less persistent earnings than firms with less conservative accounting. We also document that the pricing multiple on more conservative earnings is smaller than pricing multiples on less conservative earnings. Finally, we show that conditionally conservative earnings are less persistent than unconditionally conservative earnings and the pricing multiple on earnings is smaller for conditionally conservative earnings than for unconditionally conservative earnings. Our results improve our understanding of the characteristics of conservatively-reported earnings.

Keywords: Accounting conservatism; Conditional conservatism; Unconditional conservatism; Earnings persistence; Pricing multiples

JEL Classification: M41; C23; D21; G38; N20

Suggested Citation

Chen, Lucy Huajing and Folsom, David and Paek, Wonsun and Sami, Heibatollah, Accounting Conservatism, Earnings Persistence, and Pricing Multiples on Earnings (November 6, 2013). Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=964250 or http://dx.doi.org/10.2139/ssrn.964250

Lucy Huajing Chen (Contact Author)

Villanova University ( email )

United States
610-519-6321 (Phone)

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

Wonsun Paek

Sungkyunkwan University ( email )

25-2, Sungkyunkwan-ro
Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)
+82-2-760-0415 (Phone)
+82-2-745-4566 (Fax)

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

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