Accepted by Gord Richardson. The authors gratefully acknowledge financial support from the Social Sciences and Humanities Research Council of Canada and Queen's School of Business. They also appreciate receiving constructive suggestions and comments on previous versions of the paper from workshop participants at the University of Georgia (J.M. Tull School of Accounting), the University of Calgary, Queen's University, HEC Montréal, and the University of Waterloo. Particular thanks go to Linda Bamber, Benjamin Ayres, Steve Baginski, Bill Cannon, Claude Laurin, Peter Martin, Isabel Wang, George Wilson, the referees, and the editor.
The Link between Earnings Conservatism and the Price-to-Book Ratio*
Article first published online: 15 JAN 2010
2005 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 22, Issue 3, pages 693–717, Fall 2005
How to Cite
PAE, J., THORNTON, D. B. and WELKER, M. (2005), The Link between Earnings Conservatism and the Price-to-Book Ratio. Contemporary Accounting Research, 22: 693–717. doi: 10.1506/9FDN-N6ED-LJE9-A1HL
- Issue published online: 15 JAN 2010
- Article first published online: 15 JAN 2010
- Accounting conservatism;
- Price-to-book ratios;
We hypothesize and find that (1) earnings conservatism, the tendency of firms to recognize bad news in earnings on a more timely basis than good news, is substantially greater in portfolios of firms with lower price-to-book ratios than in portfolios of firms with higher price-to-book ratios; and (2) the negative association between earnings conservatism and the price-to-book ratio stems primarily from the accrual component of earnings, not the operating cash flow component of earnings. Our results suggest that studies using earnings-returns associations to investigate cross-sectional or time-series differences in earnings conservatism risk drawing erroneous inferences unless the research designs control for cross-sectional or time-series variation in price-to-book ratios.