Conservatism, growth, and return on investment

Rajan, Madhav V.; Reichelstein, Stefan; Soliman, Mark T.

doi:10.1007/s11142-007-9035-2

Cited by 72 publications

(17 citation statements)

References 68 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Both Ohlson and Gao (2006) and Rajan et al (2007) derive results similar to those above, albeit from slightly different perspectives. Although their approach is somewhat different from ours, both approaches imply the return on equity is negatively related to growth under a conservative accounting policy.…”

Section: A Measure Of Conservatismsupporting

confidence: 70%

Conservatism in residual income models: theory and supporting evidence

Ashton

Wang

2015

Accounting and Business Research

View full text Add to dashboard Cite

In this paper, we develop a framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. We explore specific examples of both unconditional and conditional conservatism and observe a common mathematical structure. We proceed to generalise our model and identify the joint dependency of conservatism and the persistence of abnormal earnings on the weights attached to book values, earnings and dividends.We are able to show theoretically the likely numerical impact of conservatism on price-earnings ratios and under valuations produced by residual income models. We investigate empirically the interaction between conservatism and persistence and find they accord well with the theory developed. We briefly discuss the implications for testing of the effect of conservatism on valuation and linear information dynamics.

show abstract

Section: A Measure Of Conservatismsupporting

confidence: 70%

Conservatism in residual income models: theory and supporting evidence

Ashton

Wang

2015

Accounting and Business Research

View full text Add to dashboard Cite

show abstract

“…Consistent with earlier findings, the results in Table III indicate that profitability mean reversion decreases with firm market share, MTB, and diversification and increases with firm R&D (Cheng 2005), industry MTB (Nissim and Penman 2001), and the Herfindahl index (Jacobsen 1988). The country-level earnings timeliness estimate is positive and weakly significant, indicating that countries with more timely earnings have slower mean reversion (Rajan et al 2007). …”

Section: Resultssupporting

confidence: 87%

“…Differences in accounting standards and institutional characteristics can lead to differences in how accounting measures of profitability capture economic rate of returns (Rajan, Reichelstein, and Soliman 2007). We control for earnings timeliness measured from an asymmetric timeliness model of earnings and returns as in Bushman and Piotroski (2006).…”

mentioning

confidence: 99%

Market competition, earnings management, and persistence in accounting profitability around the world

et al. 2014

View full text Add to dashboard Cite

We examine how cross-country differences in product, capital, and labor market competition, as well as earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns-but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive but slows it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.

show abstract

“…Their notion of unbiased accounting is that the market-to-book ratio approaches a value of 1 asymptotically. In the literature on ROI, the concept of unbiased accounting is operationalized by the criterion that for an individual project the accounting rate of return should be equal to the project's internal rate of return; see, for instance, Beaver and Dukes (1974), Rajan, Reichelstein and Soliman (2007), and Staehle and Lampenius (2010). To satisfy this criterion, the accruals must generally reflect the intrinsic profitability of the project.…”

Section: Conservatism Correctionmentioning

confidence: 99%

Conservatism correction for the market-to-book ratio and Tobin’s q

2014

Self Cite

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Conservatism Correction for the Market-To-Book Ratio and Tobin's q Terms of use: Documents in AbstractWe decompose the market-to-book ratio into two additive components: a conservatism correction factor and a future-to-book ratio. The conservatism correction factor exceeds the benchmark value of one whenever the accounting for past transactions has been subject to an (unconditional) conservatism bias. The observed history of a firm's past investments allows us to calculate the magnitude of its conservatism correction factor, resulting in an average value that is about two-thirds of the overall market-to-book ratio. We demonstrate that our measure of Tobin's q, obtained as the market-to-book ratio divided by the conservatism correction factor, has greater explanatory power in predicting future investments than the market-to-book ratio by itself. Our model analysis derives a number of structural properties of the conservatism correction factor, including its sensitivity to growth in past investments, the percentage of investments in intangibles, and the firm's cost of capital. We provide empirical support for these hypothesized structural properties. JEL-Code: M410, L250, G110.

show abstract

Conservatism, growth, and return on investment

Cited by 72 publications

References 68 publications

Conservatism in residual income models: theory and supporting evidence

Conservatism in residual income models: theory and supporting evidence

Market competition, earnings management, and persistence in accounting profitability around the world

Conservatism correction for the market-to-book ratio and Tobin’s q

Contact Info

Product

Resources

About