nach oben

Review of Accounting Studies

Erschienen in:

01.12.2014

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

verfasst von: Maureen McNichols, Madhav V. Rajan, Stefan Reichelstein

Erschienen in: Review of Accounting Studies | Ausgabe 4/2014

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

We 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.

Vorheriger Artikel The role of “other information” in analysts’ forecasts in understanding stock return volatility

Nächster Artikel Valuation of tax expense

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

Without attempting to summarize the extensive literature on accounting conservatism, we note that parts of the theoretical literature on unconditional conservatism take a market-to-book ratio greater than one as a manifestation of conservative accounting; see, for example, Feltham and Ohlson (1995, 1996), Zhang (2000), and Ohlson and Gao (2006).

This calibration is consistent with Ross et al. (2005, p. 41) who state: “Firms with high q ratios tend to be those firms with attractive investment opportunities, or a significant competitive advantage.” See also Lindenberg and Ross (1981), Landsman and Shapiro (1995) and Roll and Weston (2008).

Our model framework builds on the notion that firms undertake a sequence of overlapping investments in productive capacity. That feature is also central to the models in Arrow (1964), Rogerson (2008), Rajan and Reichelstein (2009), and Nezlobin (2012).

For the market-to-book ratio, the predicted impact is ambiguous since both the numerator and the denominator of this ratio are increasing in higher past growth.

This approach is broadly consistent with the valuation model formulated in Nezlobin (2012), where the capitalization of current economic profits reflects both the discount rate and the rate of growth in the firm’s sales revenues.

We note that our present model formulation is not suited to address issues of conditional conservatism, as considered, for instance, in Basu (1997) and Watts (2003).

The addition of accounting information is, of course, the general motivation for studies like those in Piotroski (2000), Mohanram (2005), and Penman and Reggiani (2013). By including firm-specific scores derived from financial statement analysis, these authors are able to refine the association between market-to-book ratios and stock returns by partitioning firms with similar market-to-book ratios into different subgroups.

In connection with solar power panels, it is commonly assumed that electricity yield is subject to “systems degradation,” which is modeled as a pattern of geometrically declining capacity levels (Campbell 2008).

Conceptually, it would not be difficult to extend our model formulation so as to include uncertainty and investors’ expectations. Such an extension would, however, not serve any particular purpose for either our theoretical or our empirical analysis.

Without reference to a hypothetical rental market, Arrow (1964) and Rogerson (2008) derive the same unit cost of capacity in an infinite horizon setting with new investments in each period.

Our notion of replacement cost accounting differs from the concept of unbiased accounting in Feltham and Ohlson (1995, 1996), Zhang (2000), and Ohlson and Gao (2006). 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 et al. (2007), and Staehle and Lampenius (2010). To satisfy this criterion, the accruals must generally reflect the intrinsic profitability of the project. In the special case where all projects have zero NPV, this criterion does coincide with our notion of unbiased accounting. In contrast, our notion of replacement accounting is consistent with the accounting treatment recommended in the managerial performance evaluation literature; see, for instance, Rogerson (1997), Reichelstein (1997), and Dutta and Reichelstein (2005)

When assets are not in productive use during the first L periods, they become more valuable over time. Therefore the depreciation charges in the first L − 1 periods are negative with \(d^{*}_{t} = - r \cdot (1+r)^{t-1}\) for 1 ≤ t ≤ L − 1. This is exactly the accounting treatment that Ehrbar (1998) recommends for so-called “strategic investments,” which are characterized by a long time lag between investments and subsequent cash inflows.

See also Proposition 2 in Staehle and Lampenius (2010).

The AICPA’s (2007, p. 399) Accounting Trends & Techniques survey of 600 Fortune 1,000 firms reports that 592 of the sample firms applied straight-line accounting in reporting the value of their operating assets.

It is readily verified that, if d ^o is uniformly more accelerated than d ^* = (0, d ₁ ^* , d ₂ ^* , ..., d _T ^* ), then so is d _t ^o .

The condition on the x _t’s in the statement of Proposition 3 is sufficient but not necessary. This condition is also not very restrictive. For instance, it is satisfied by any \({\varvec{x}}\) vector that decreases over time in either a linear or geometric fashion. The one-hoss shay scenario, where all x _t = 1, is one particular admissible case.

Informally, this inequality follows from the following two observations. (1) On the interval [0, L − 1], it is clearly true that bv _t ^* > bv _t ^o ; (2) on the interval [L,T − 1] it must also be true that bv _t ^* > bv _t ^o , because bv _T ^* = bv _T ^o = 0 and bv _t ^* is decreasing and concave on [L, T], while bv _t ^o is a linear function of time.

For general L > 1, it can be shown that at least half of the drop in CC _T occurs in the range of negative growth rates, provided productivity conforms to the one-hoss shay scenario.

This finding can be extended to general values of β and L. The limit values are available from the authors upon request. We note that \( \lim_{\lambda \rightarrow -1} CC_T = \frac{bv^{*}_{T-1}}{bv^{o}_{T-1}}\) and \(\lim_{\lambda \rightarrow \infty} CC_T = \frac{bv^{*}_{1}}{bv^{o}_{1}}\). Here, bv _t ^o ≡ bv _t(d ^o).

We shall from hereon use the more compact notation BV _T ^o instead of BV _T(I _T, d ^o). Similarly, we use the shorter BV _T ^* (or OA _T ^* ) instead of BV _T(I _T, d ^*) (or OA _T(I _T, d ^*)).

This representation is, of course, consistent with the studies in Feltham and Ohlson (1995) and Penman et al. (2007), which presume that financial assets are carried at their fair market values on the balance sheet.

See, for example, the discussion by Erickson and Whited (2000), p. 1029.

Lindenberg and Ross did not test whether this improved their measure of q, and the SEC subsequently abandoned the requirement to disclose replacement cost of property and plant.

It goes without saying that our approach to forecasting future value is somewhat ad hoc. There appear to be many promising avenues for refining the approach taken here in future studies.

Our approach of incorporating income taxes avoids the issues of estimating the firm’s actual tax rate or taxes to be paid in future periods.

Our capitalization of current economic profit is broadly consistent with the valuation model developed in Nezlobin (2012). We use the average growth rate over the past three years as a proxy for anticipated future growth in the firm’s product markets.

Throughout our empirical analysis, we set the lag factor L equal to 1. It seems plausible that there are significant variations in L across industries, an aspect we do not pursue in this paper.

See, for instance, Fazzari et al. (1988, 2000), Kaplan and Zingales (1997), Erickson and Whited (2000), Baker et al. (2003), Rauh (2006), and McNichols and Stubben (2008).

It should be recalled at this stage that our framework allows for only a single category of operating assets and correspondingly growth in one dimension. Zhang (1998) considers the impact of differential growth rates for PPE and intangible assets.

A caveat to this interpretation is that measurement error in our estimate of \(\widehat{FB}_T\) is not highly correlated with past growth. To the extent such a correlation arises, it could induce a negative correlation between \(\widehat{CC}_T\) and past growth. We do not expect this effect to be driving our results as the correlation between \(\widehat{CC}_T\) and past growth is largely comparable to the correlation between CC _T and past growth.

A proof of this assertion can be found in Claim 2 in the proof of Proposition 3 in Rajan and Reichelstein (2009).

American Institute of Certified Public Accountants. (2007). Accounting trends and techniques. New York, NY: AICPA.

Arrow, K. (1964). Optimal capital policy, cost of capital and myopic decision rules. Annals of the Institute of Statistical Mathematics 1–2, 21–30.CrossRef

Baker, M., Stein, J., & Wurgler, J. (2003). When does the market matter? Stock prices and the investment of equity-dependent firms. Quarterly Journal of Economics, 118, 969–1005.CrossRef

Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24, 3–37.CrossRef

Beaver, W., & Dukes, R. (1974). Delta depreciation methods: Some analytical results. Journal of Accounting Research, 9, 391–419

Beaver, W., & Ryan, S. (2000). Biases and lags in book value and their effects on the ability of the book-to-market ratio to predict book return on equity. Journal of Accounting Research, 38, 127–148.CrossRef

Beaver, W., & Ryan, S. (2005). Conditional and unconditional conservatism: Concepts and modeling. Review of Accounting Studies, 10, 260–309.

Belsey, D., Kuh, E., & Welsch, R. (1980). Regression diagnostics: Identifying influential data and sources of collinearity. New York, NY: Wiley.CrossRef

Campbell, M. (2008). The drivers of the levelized cost of electricity for utility-scale photovoltaics. White Paper: Sunpower Corporation.

Dutta, S., & Reichelstein, S. (2005). Accrual accounting for performance evaluation. Review of Accounting Studies, 10, 527–552.CrossRef

Edwards, S., & Bell, S. (1961). The theory and measurement of business income. Berkeley, CA: University of California Press.

Ehrbar, A. (1998). The real key to creating wealth. New York, NY: Wiley.

Erickson, T., & Whited, T. M. (2000). Measurement error and the relationship between investment and q. Journal of Political Economy, 108, 1027–1057.CrossRef

Fama, E., & French, K. (1992). The cross-section of expected stock returns. Journal of Finance, 47, 427–486.CrossRef

Fama, E., & French, K. (2006). Profitability, investments and average returns. Journal of Financial Economics, 82, 491–518.CrossRef

Fazzari, S., Hubbard, G., & Petersen, B. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, 1, 141–195.CrossRef

Fazzari, S., Hubbard, G., & Petersen, B. (2000). Investment-cash flow sensitivities are useful: A comment on Kaplan-Zingales. Quarterly Journal of Economics, 115, 695–705.CrossRef

Feltham, G., & Ohlson, J. (1995). Valuation and clean surplus accounting for operating and financial decisions. Contemporary Accounting Research, 11, 689–731.CrossRef

Feltham, G., & Ohlson, J. (1996). Uncertainty resolution and the theory of depreciation measurement. Journal of Accounting Research, 34, 209–234.CrossRef

Gow, I., Ormazabal, G., & Taylor, D. (2010). Correcting for cross-sectional and time-series dependence in accounting research. The Accounting Review, 85, 483–512.CrossRef

Hayashi, F. (1982). Tobin’s marginal q and average q: A neoclassical interpretation. Econometrica, 50, 213–224.CrossRef

Ibbotson and Associates (2012). Stocks, bonds, bills and inflation.

Iman, R., & Conover, W. (1979). The use of rank transform in regression. Technometrics, 21, 499–509.CrossRef

Kaplan, S., & Zingales, L. (1997). Do investment cash flow sensitivities provide useful measures of financing constraints? The Quarterly Journal of Economics, 112, 169–215.CrossRef

Landsman, W., & Shapiro, A. (1995). Tobin’s q and the relation between accounting ROI and economic return. Journal of Accounting. Auditing and Finance, 10, 103–121.

Lakonishok, J., Shleifer, A., & Vishny, R. (1994). Contrarian investment, extrapolation and risk. Journal of Finance, 44, 1541–1578.CrossRef

Lewellen, W., & Badrinath, S. G. (1997). On the measurement of Tobin’s q. Journal of Financial Economics, 44, 77–122.CrossRef

Lindenberg, J., & Ross, S. (1981). Tobin’s q and industrial organization. Journal of Business, 54, 1–32.CrossRef

McNichols, M., & Stubben, S. (2008). Does earnings management affect firms’ investment decisions? The Accounting Review, 83, 1571–1603.CrossRef

Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48, 261–297.

Mohanram, P. (2005). Separating winners from losers among low book-to-market stocks using financial statement analysis. Review of Accounting Studies, 10, 133–170.CrossRef

Nezlobin, A. (2012). Accrual accounting, informational sufficiency, and equity valuation. Journal of Accounting Research, 50(1), 233–273.CrossRef

Ohlson, J., & Gao, Z. (2006). Earnings, earnings growth and value. Foundations and Trends in Accounting, 1, 1–70.

Penman, S. (1996). The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth. Journal of Accounting Research, 34, 235–259.CrossRef

Penman, S. (2009). Financial statement analysis and security valuation (4th ed.). New York, NY: MaGraw-Hill, Irwin.

Penman, S., & Reggiani, F. (2013). Returns to buying earnings and book value: Accounting for growth and risk. Review of Accounting Studies, 18, 1021–1049.

Penman, S., Richardson, S., & Tuna, I. (2007). The book-to-price effect in stock returns: Accounting for leverage. Journal of Accounting Research, 45, 427–467.CrossRef

Penman, S., & Zhang, X. (2002). Accounting conservatism, the quality of earnings and stock returns. The Accounting Review, 77, 237–264.CrossRef

Peterson, M. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480.CrossRef

Piotroski, J. (2000). Value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research, 38, 1–41.CrossRef

Poterba, M. (1988). Comment: Financing constraints and corporate investment. Brookings Papers on Economic Activity, 1, 200–206.

Rajan, M., & Reichelstein, S. (2009). Depreciation rules and the relation between marginal and historical cost. Journal of Accounting Research, 47, 823–865.CrossRef

Rajan, M., Reichelstein, S., & Soliman, M. (2007). Conservatism, growth, and return on investment. Review of Accounting Studies, 12, 325–370.CrossRef

Rauh, J. (2006). Investment and financing constraints: Evidence from the funding of corporate pension plans. The Journal of Finance, 61, 33–71.CrossRef

Reichelstein, S. (1997). Investment decisions and managerial performance evaluation. Review of Accounting Studies, 2, 157–180.CrossRef

Rosenberg, K., Reid, K., & Lanstein, R. (1985). Persuasive evidence of market inefficiency. Journal of Portfolio Management, 11, 9–17.CrossRef

Roychowdhury, M., & Watts, R. (2007). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting and Economics, 44, 2–31.CrossRef

Rogerson, W. (1997). Inter-temporal cost allocation and managerial investment incentives: A theory explaining the use of economic value added as a performance measure. Journal of Political Economy, 105, 770–795.CrossRef

Rogerson, W. (2008). Intertemporal cost allocation and investment decisions. Journal of Political Economy, 116, 931–950.CrossRef

Rogerson, W. (2011). On the relationship between historic cost, forward looking cost and long run marginal cost. Review of Network Economics, 10(2), Article 2.

Roll, R., & Weston, J. (2008). Average and marginal Tobins q as indicators of future growth opportunities, expected return, and risk. Working Paper, UCLA.

Ross, S., Westerfield, R., & Jaffe, J. (2005). Corporate finance. New York, NY: McGraw-Hill Press.

Ryan, S. (1995). A model of accrual measurement with implications for the evaluation of the book-to-market ratio. Journal of Accounting Research, 33, 95–112.CrossRef

Staehle, M., & Lampenius, N. (2010). Are PE- and MB-ratios susceptible to accruals, growth and profitability? Working paper, University of Hohenheim, Germany.

Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1, 15–29.CrossRef

Vuong, Q. H. (1989). Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica, 57, 307–333.CrossRef

Watts, R. (2003). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17, 207–221.CrossRef

Zhang, X. (1998). The analysis of line items in earnings forecasting and equity valuation. Ph.D. Dissertation, Graduate School of Business Columbia University.

Zhang, X. (2000). Conservative accounting and equity valuation. Journal of Accounting and Economics, 29, 125–149.CrossRef

Titel: Conservatism correction for the market-to-book ratio and Tobin’s q
verfasst von: Maureen McNichols
Madhav V. Rajan
Stefan Reichelstein
Publikationsdatum: 01.12.2014
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 4/2014
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-013-9275-2

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2014

Product market competition and conditional conservatism

The role of “other information” in analysts’ forecasts in understanding stock return volatility

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

Initial evidence on the market impact of the XBRL mandate

Analyst information production and the timing of annual earnings forecasts

Is the effect of industry expertise on audit pricing an office-level or a partner-level phenomenon?