The relationship between conservatism in financial reporting and subsequent equity returns
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Date
Authors
Badenhorst, Wessel M.
Journal Title
Journal ISSN
Volume Title
Publisher
Independent Regulatory Board for Auditors (IRBA), South African Institute of Chartered Accountants (SAICA) and Southern African Accounting Association (SAAA)
Abstract
This study investigates whether or not long-term discretionary accounting conservatism has benefits for equity investors, as measured by long-term subsequent equity returns. Based on the long-term relationship between cash flows and earnings documented by Dechow (1994), this paper develops a new proxy for discretionary accounting conservatism. This proxy utilises earnings before interest and tax and cash flow generated by operations, highlighting conservative discretion within earnings. Importantly, and in contrast to prior research, this study controls for market assessments of the growth prospects of sample firms and finds that discretionary accounting conservatism is insignificantly related to subsequent equity returns, once market assessments of growth prospects have been controlled for. Compensating for cross-sectional differences, based on the relative gearing of firms, reveal that the relationship between subsequent equity returns and discretionary accounting conservatism remains insignificant, regardless of the level of gearing of the sample firm.
Description
Keywords
Discretionary conservatism, Equity returns, Growth firms
Sustainable Development Goals
Citation
Badenhorst, WM 2013, 'The relationship between conservatism in financial reporting and subsequent equity returns', SA Journal of Accounting Research, vol. 27, no. 1, pp. 125-142.