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An International Meeting of American Accounting
Association
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Conservatism and the Value Relevance of Accounting Information |
Sudhakar V. Balachandran
Columbia University
Partha S Mohanram
Columbia University
Abstract: This paper examines the association between conservatism and the value relevance of accounting information. We measure conservatism as downward bias in book values and asymmetric timeliness of earnings using approaches developed in Beaver & Ryan (2000), Penman & Zhang (2002) and Basu (1997). We examine the relationship between our measures of conservatism and the value relevance of accounting over a twenty-five year period from 1978-2002. We find that value relevance has declined the most for firms with the least conservative accounting (measured as downward bias in book values) and that value relevance has not changed significantly in firms with increasing conservatism due to R&D and advertising. Further tests indicate that the decline in value relevance cannot be attributed to conservatism based on increases in the asymmetric timeliness of earnings. Our findings limit the plausibility of attributing decreasing value relevance to increasing conservatism in accounting.