Conservatism and Value Relevance of Accounting Information

Document Type : Original Article

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Abstract

This paper examines the association between conservatism and the value relevance of accounting information over the1384 through 1389 period. We measure conservatism using model of Beaver and Ryan (2000) with respect to net assets measure. We also used approaches developed in Easton and Harris (1991) and Francis and Schipper (1999) to measure value relevance of returns and price, respectively. In order to examine the relationship between conservatism and value relevance of accounting information, we partition 822 observations (year-firm) to four groups with respect to levels of conservatism (high and low) as well as trend in conservatism (increasing and non-increasing). For examining each of two hypotheses, we calculated the adjusted R2 from regression of price on earnings and book values as well as the adjusted R2 from regression of returns on earnings and changes in earnings for each of years between 1384 through 1389
separately and then we used the average of six year’s adjusted R2 as a measure of value relevance. Afterwards, we used the average to examine whether the difference of value relevance of levels and trends in conservatism is significant. We used the paired-independence test for this purpose.
Despite the increasing conservatism in recent years, we find no evidence that conservatism is related to value relevance. With respect to the first hypothesis although the measure of value relevance in firms with high levels of conservatism is more than those of low levels, the difference between them is not significant. This result applies to the second hypothesis, too.

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History

  • Receive Date: 09 August 2013
  • Revise Date: 24 October 2017
  • Accept Date: 12 September 2013

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