Download Conditional and Unconditional Conservatism: Implications for by Julia Nasev (auth.) PDF

By Julia Nasev (auth.)

At the center of the present debate on monetary reporting criteria is conservatism. it really is one of many oldest ideas in accounting. most glaringly, conservatism is mirrored in excessive market-to-book ratios indicating that accounting dimension understates publication price relative to marketplace worth. Julia Nasev examines the effect of conservative accounting numbers on valuation estimates and on genuine monetary judgements reminiscent of fee stickiness.

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Extra resources for Conditional and Unconditional Conservatism: Implications for Accounting Based Valuation and Risky Projects

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According to us, this is the case because the Fama/French cost of capital are occasionally very low. Finally, varying the cost of capital does not affect the results we obtain for the OM and FOM when estimated using the valuation function. We eliminate the top and bottom 0, 1, 3 or 5% extreme observations when estimating the LIM parameters. When we eliminate more observations, the results remain stable. Yet, some of the results are distorted when we eliminate fewer observations than reported so far.

This has been attributed to the negative sample mean of residual income. Consequently, instead of correcting the conservatism bias the correction reinforces the bias. To mitigate this problem Choi/O’Hanlon/Pope (2006) include an additional correction J 0bt in the second LIM equation exploiting that the mean of the other information variable (measured on the basis of analysts’ forecasts of residual income) is generally positive over the estimation period. The authors argue that a positive mean other information variable is consistent with expected unwinding of conservatism.

Previous research implementing LIMs typically estimates the persistence parameters for the entire sample and then applies these parameters to obtain market value forecasts. However, this approach does not account for different conservatism levels across the sample. The discontinuous lines in figure 1 indicate the behavior of bias for models that are estimated on such a pooled basis. Bias increases for the OM with higher levels of conservatism (measured by MTB deciles) indicating its inability to capture conservatism.

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