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Erschienen in: Review of Accounting Studies 2/2011

01.06.2011

Is the decline in the value relevance of accounting driven by increased conservatism?

verfasst von: Sudhakar Balachandran, Partha Mohanram

Erschienen in: Review of Accounting Studies | Ausgabe 2/2011

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Abstract

This paper examines the association between conservatism and the value relevance of accounting information over the 1975 through 2004 period. We measure conservatism using approaches developed in Penman and Zhang, The Accounting Review 77:237–264, (2002) and Beaver and Ryan, Journal of Accounting Research 38:127–148, (2000) and value relevance using (1) adjusted R 2 from regressions of price on earnings and book values, (2) adjusted R 2 from regressions of returns on earnings and changes in earnings, and (3) returns earned by perfect foresight of earnings and book values. We find no evidence that firms with increasing conservatism exhibit greater declines in value relevance. Rather, we observe most significant declines in value relevance for firms where conservatism has not increased. When we adjust financial statements for the effects of conservatism, we find that the value relevance of adjusted numbers is generally lower and trends in value relevance unaffected. Based on these results, it is implausible that increasing conservatism drives the decline in value relevance.

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Fußnoten
1
This tradeoff is discussed in depth in the FASB’s Conceptual Framework (FASB 1980; FASB 2004).
 
2
Results are virtually identical if we use the average adjusted R 2 from 48 separate industry regressions each year.
 
3
The trend in incremental adjusted R 2 for loss adjustment is a significant +0.13% per year. The trend for industry controls is insignificant. Given the substantial improvement in adjusted R 2, we continue to use industry controls.
 
4
Brown et al. (1999) also recommend using scalars such as total assets and sales as deflators for per-share regressions. We rerun the price regressions scaling by assets or sales. Results and trends across groups are similar and not tabulated.
 
5
Results are virtually identical if we estimate the regressions using book-to-market as the dependent variable and the negative of the sum of the time and firm-fixed effect as our measure of conservatism.
 
6
Results are virtually identical if we set missing returns to the market return instead of zero.
 
7
Correspondingly declines in activities subject to conservative accounting lead to decreases in the downward bias on book values and create an upward bias in income.
 
8
From footnote 2, page 354 of Lev and Zarowin (1999).
 
9
We measure the trend in conservatism for a firm in year t by running firm-specific regressions with BR-CONS or C-SCORE in years t − 4 to t as the dependent variable and year as the independent variable, ensuring that at least three years of data are available. We use a trend-based approach instead of year-over-year changes in conservatism because conservatism measures (especially BR-CONS) can be unstable over short periods.
 
10
The results are similar if we exclude utilities and financial services.
 
11
The results are similar without the deletion of extreme observations.
 
12
BR-CONS measures conservatism after controlling for delayed recognition of gains and losses. As it can be affected by past application of conditional conservatism, it is unlikely to be perfectly correlated with C-SCORE.
 
13
FASB statements that have precipitated increased conservatism include SFAS 68 (Research and Development Arrangements, 1982), SFAS 106 (Employer's Accounting for Postretirement Benefits Other Than Pensions, 1992), and SFAS 123 (Accounting for Stock-Based Compensation, 1995 revised 2004). However, the accounting standards related to the expensing of R&D (SFAS 2, issued 1974) have stayed constant throughout the period analyzed.
 
14
The average value relevance reported in this paper (77.3% across 30 years) is higher than that reported in prior research. As seen in Fig. 1a, b, this is largely attributable to the controls for losses and industry. Adding variables such as R&D, advertising, and sales growth to the regression leads to insignificant increases in adjusted R 2 (less than 2%), considerably lower than the incremental R 2 for the controls for losses and industry. This validates the use of earnings and book values as summary statistics for the value relevance of accounting.
 
15
The difference in adjusted trends, 0.15%, is insignificant (t-stat = 0.82). If the difference had been 0.30%, the t-stat would have been 1.65, significant at the 10% level.
 
16
The difference in adjusted trends between the groups is 0.27%, marginally insignificant with a t-stat of 1.52. A difference of 0.293% would have been significant at the 10% level.
 
17
The difference in adjusted trends between the groups is 0.31%, insignificant with a t-stat of 1.16. A difference of 0.44% would have been significant at the 10% level.
 
18
We use a tax rate of 35% for our tax-adjustment of the balance sheet and income statement. Results are virtually identical if we use a time varying rate of taxes based on prevailing corporate tax rates.
 
19
Francis and Schipper’s (1999) classification uses average R&D intensity by 3-digit SIC code over the 1950 through 1981 period. We use the Fama and French’s (1997) industry classification over our sample period (1975 through 2004). Results remain similar if we use the exact industry classification they do. The 6% threshold ensures that the number of observations in the high-technology and other groups is similar.
 
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Metadaten
Titel
Is the decline in the value relevance of accounting driven by increased conservatism?
verfasst von
Sudhakar Balachandran
Partha Mohanram
Publikationsdatum
01.06.2011
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 2/2011
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-010-9137-0

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