Conservatism measures that control for the effects of economic rents on stock returns

Judson A. Caskey; Kyle Peterson

doi:10.1007/s11156-013-0360-1

Review of Quantitative Finance and Accounting

May 2014, Volume 42, Issue 4, pp 731–756

Conservatism measures that control for the effects of economic rents on stock returns

Authors
Authors and affiliations

Judson A. Caskey
Kyle PetersonEmail author

Original Research

First Online:: 20 March 2013

2 Citations
425 Downloads

Abstract

Recent studies show that regression-based estimates of accounting conservatism reflect both differences in the asymmetric recognition of bad news and differences in asset composition. In particular, a firm’s market value and returns reflect both assets-in-place and expected future rents, while book values tend to reflect only assets-in-place. We propose two tests that remove the effect of asset composition on cross-sectional comparisons of accounting conservatism. First, a test based on a ratio of regression coefficients allows for valid cross-sectional comparisons of conservatism relative to overall news recognition. Second, in some cases, researchers can separately identify and make cross-sectional comparisons of the fraction of good news recognized and the fraction of bad news recognized. The estimates in this second scenario use a regression of earnings on returns interacted with a book-to-market ratio. We validate our model by deriving and testing several predictions based on it.

Keywords

Accounting conservatism Asymmetric timeliness Book-to-market ratio Returns-earnings relation

JEL Classification

M41 G10 G30 N20

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Authors and Affiliations

Judson A. Caskey
- 1
Kyle Peterson
- 2
Email author

1.McCombs School of BusinessUniversity of Texas, AustinAustinUSA
2.Lundquist College of BusinessUniversity of OregonEugeneUSA

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Conservatism measures that control for the effects of economic rents on stock returns

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