Download or read book Conditional and Unconditional Conservatism written by Julia Nasev and published by Springer Science & Business Media. This book was released on 2009-12-28 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Julia Nasev examines the impact of conservative accounting numbers on valuation estimates and on real economic decisions such as cost stickiness.
Download or read book Valuation Implications of Unconditional Accounting Conservatism written by Jae B. Kim and published by . This book was released on 2018 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross-sectional analysis suggests that more sophisticated analysts and superior long-term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts' earnings forecasts are negatively associated with the degree of conservatism, i.e., analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings-based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.
Download or read book Accounting Conservatism and the Stock Market written by Carlo D’Augusta and published by Springer Nature. This book was released on with total page 89 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Effect of Accounting Conservatism on Firm Valuation written by Yonpae Park and published by . This book was released on 2002 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Financial Statement Analysis and Security Valuation written by Stephen H. Penman and published by . This book was released on 2010 with total page 754 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation is at the heart of investing. A considerable part of the information for valuation is in the financial statements.Financial Statement Analysis and Security Valuation, 5 e by Stephen Penman shows students how to extract information from financial statements and use that data to value firms. The 5th edition shows how to handle the accounting in financial statements and use the financial statements as a lens to view a business and assess the value it generates.
Download or read book Management Through Accounts written by James Harris Bliss and published by . This book was released on 1924 with total page 880 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Truth in Accounting written by Kenneth MacNeal and published by University of Pennsylvania Press. This book was released on 2016-11-11 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a volume in the Penn Press Anniversary Collection. To mark its 125th anniversary in 2015, the University of Pennsylvania Press rereleased more than 1,100 titles from Penn Press's distinguished backlist from 1899-1999 that had fallen out of print. Spanning an entire century, the Anniversary Collection offers peer-reviewed scholarship in a wide range of subject areas.
Download or read book Accounting Conservatism and Its Implication on Valuation in Commercial Banks written by Jing Li and published by . This book was released on 2004 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Download or read book Conservatism in Residual Income Models written by Pengguo Wang and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Equity Valuation written by Peter O. Christensen and published by Now Publishers Inc. This book was released on 2009 with total page 127 pages. Available in PDF, EPUB and Kindle. Book excerpt: We review and critically examine the standard approach to equity valuation using a constant risk-adjusted cost of capital, and we develop a new valuation approach discounting risk-adjusted fundamentals, such as expected free cash flows and residual operating income, using nominal zero-coupon interest rates. We show that standard estimates of the cost of capital, based on historical stock returns, are likely to be a significantly biased measure of the firm's cost of capital, but also that the bias is almost impossible to quantify empirically. The new approach recognizes that, in practice, interest rates, expected equity returns, and inflation rates are all stochastic. We explicitly characterize the risk-adjustments to the fundamentals in an equilibrium setting. We show how the term structure of risk-adjustments depends on both the time-series properties of the free cash flows and the accounting policy. Growth, persistence, and mean reversion of residual operating income created by competition in the product markets or by the accounting policy are key determinants of the term structure of risk-adjustments.
Download or read book Conditional Conservatism in Accounting written by Giorgio Gotti and published by . This book was released on 2007 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting standards mandate different, more conservative, rules for the recognition of unrealized gains than unrealized losses in reported earnings. Conditional conservatism, defined as asymmetric timeliness in the recognition of unrealized losses vs. gains in reported earnings has, since its origins, been a peculiar characteristic of the accounting system. Understanding conservatism's role, its determinants, and its variations across firms is important for interpreting the nature, purposes, and valuation implications of accounting. Basu (1995; 1997) proposed a model to detect accounting conditional conservatism and provided empirical evidence that bad news is recognized more quickly than good news in earnings for a sample over the period 1963-1991. Following his seminal work1, accounting literature adopted the Basu single-period model to measure conditional conservatism (Ball et al. 2000; Ball et al. 2005; Ball and Shivakumar 2005; Lobo and Zhou 2006). However, Basu's proxy for measuring the arrival of good/bad news, the price of the firm's stock, may be influenced, in part, by factors that will never be recorded in a firm's reported earnings. This introduces inaccuracy in the measure of conditional conservatism. To address the problems, I introduce a new measure of conditional conservatism, which results from a Least Absolute Deviation (LAD) piecewise regression and adopts the number of changes in financial analysts' EPS forecasts as a proxy for good/bad news. Then, I use this new measure to test the determinants, suggested by previous literature, of conditional conservatism in accounting. Results show that companies with (1) lower debt-to-assets ratio, (2) large proportion of executives' annual compensation independent of the firm's accounting performance, (3) one of the big 4/big 7 audit firms as auditor, and a auditor opinion qualified with a going concern assumption the previous year exhibit a greater timeliness in the recognition of bad news than good news in annual earnings.
Download or read book The End of Accounting and the Path Forward for Investors and Managers written by Baruch Lev and published by John Wiley & Sons. This book was released on 2016-06-14 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt: An innovative new valuation framework with truly useful economic indicators The End of Accounting and the Path Forward for Investors and Managers shows how the ubiquitous financial reports have become useless in capital market decisions and lays out an actionable alternative. Based on a comprehensive, large-sample empirical analysis, this book reports financial documents' continuous deterioration in relevance to investors' decisions. An enlightening discussion details the reasons why accounting is losing relevance in today's market, backed by numerous examples with real-world impact. Beyond simply identifying the problem, this report offers a solution—the Value Creation Report—and demonstrates its utility in key industries. New indicators focus on strategy and execution to identify and evaluate a company's true value-creating resources for a more up-to-date approach to critical investment decision-making. While entire industries have come to rely on financial reports for vital information, these documents are flawed and insufficient when it comes to the way investors and lenders work in the current economic climate. This book demonstrates an alternative, giving you a new framework for more informed decision making. Discover a new, comprehensive system of economic indicators Focus on strategic, value-creating resources in company valuation Learn how traditional financial documents are quickly losing their utility Find a path forward with actionable, up-to-date information Major corporate decisions, such as restructuring and M&A, are predicated on financial indicators of profitability and asset/liabilities values. These documents move mountains, so what happens if they're based on faulty indicators that fail to show the true value of the company? The End of Accounting and the Path Forward for Investors and Managers shows you the reality and offers a new blueprint for more accurate valuation.
Download or read book Valuation Weights and Accounting Conservatism written by David J. Ashton and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we develop a general framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. This affords a theoretical understanding of the signs and sizes of the valuation weights observed in regression studies of the relationship between prices, book values, earnings and dividends. We proceed to generalize our model of conservatism and are able to show theoretically the likely numerical impact of conservatism on book values, price-earnings ratios and under valuations produced by residual income models. The analysis also affords an understanding of the limitations of empirical investigations of conservatism using linear information dynamics and hence to explain the failure of many such studies to detect conservatism.
Download or read book Accounting Conservatism and the Consequences of Covenant Violations written by Yutao Li and published by . This book was released on 2011 with total page 161 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent studies document that covenant violations intensify the conflicts of interest between lenders and borrowers, and lead to greater restrictions on borrowing firms' financing and investment activities (Chava and Roberts, 2008; Roberts and Sufi, 2009b). Motivated by this literature, I investigate whether accounting conservatism, specifically conditional conservatism, mitigates the adverse consequences of debt covenant violations. I argue that conservative reporting can potentially ameliorate the conflicts of interest between lenders and borrowers. Therefore, I predict that accounting conservatism reduces the adverse impact of covenant violations on borrowers' financing and investing activities and exhibits a positive association with operating and stock market performance after covenant violations. I obtain a sample of 312 violating and 5,327 non-violating firm-quarters observations from U.S. non-financial public firms during the period of 1998 - 2007 to test my hypotheses. Using three measures of conditional conservatism and a composite measure of the three individual measures, I find that the degree of increase in borrowing firms' conservative reporting between loan initiation and covenant violation is associated with smaller reductions in firms' financing and investing activities in the post-violation period. Furthermore, my analyses provide some evidence that firms that increase conservative reporting exhibit better stock market performance, implying that conservative reporting is beneficial for shareholders after covenant violations. I find no evidence that increased accounting conservatism affects operating performance after covenant violations. My results continue to hold after controlling for pre-contracting unconditional and conditional conservatism. Overall, my dissertation provides evidence that conservative accounting practices followed by borrowing firms ease the adverse consequences of debt covenant violations. My dissertation contributes to the emerging literature on the effects of accounting quality on re-contracting outcomes after covenant violations.
Download or read book Accounting Conservatism and Real Options written by Michael J. Smith and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: I address the interaction between accounting conservatism and real options in both a staged investment and abandonment model. An accounting policy biased towards classifying a Good (Bad) project as Bad (Good) is conservative (aggressive). The accounting signal is optimally conservative when the ex ante unconditional expected terminal value is less than the second investment (staged investment) or value of the asset in its alternative use (abandonment). The relative size of the second investment is a proxy for the degree of sequentiality of the project. Since research and development projects typically require more sequential investment than fixed assets projects, the staged investment results are consistent with the differential treatment of these types of investment under U.S. Generally Accepted Accounting Principles.
Download or read book Accrual Reversal Effect and Conditional Conservatism written by Jumpei Nishitani and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the relationship between two salient features embedded in the modern financial accounting information system: accrual reversal and accounting conservatism. This relationship is analyzed using a moral hazard model in a single-period setting and two types of two-period models: pooling and separating. When the effect of accrual reversal is considered in the long term, accounting conservatism as an information bias was found to be an optimal choice for the principal in a two-separating-period setting, particularly when business risk is high and/or the informativeness of the accounting information system is low; however, accounting conservatism could never be used as an information bias under a single-period or two-pooling-period settings, even with limited liability conditions. These findings indicate that accrual reversal could be considered a driving force for conditional accounting conservatism, but not for unconditional conservatism. Moreover, accrual reversal may provide an explanation for the seemingly contradictory behavior of accounting standard-setting bodies that introduced conditional conservatism, although expressing negative attitudes toward accounting conservatism.
