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Author: James N. Myers
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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Book Description
Residual income (RI) valuation involves discounting estimated future RI over the entire life of the firm. Because accounting is conservative, price is higher than book value for the average firm, creating a large accounting gain (terminal income) at delisting for most firms. However, this terminal income is hidden from researchers because it is not included in archival databases such as Compustat. Although most valuation models posit infinite firm life, the median firm survives approximately ten years. Terminal income is omitted from recent archival valuation research and this omission creates biased valuation estimates. This explains why studies that use the residual income valuation model to estimate stock price understate stock price on average. The results suggest that the estimation of future price/book premiums is an important component of RI valuation and present a limitation of using accounting numbers to estimate firm value without reference to price.
Author: James N. Myers
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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Book Description
Residual income (RI) valuation involves discounting estimated future RI over the entire life of the firm. Because accounting is conservative, price is higher than book value for the average firm, creating a large accounting gain (terminal income) at delisting for most firms. However, this terminal income is hidden from researchers because it is not included in archival databases such as Compustat. Although most valuation models posit infinite firm life, the median firm survives approximately ten years. Terminal income is omitted from recent archival valuation research and this omission creates biased valuation estimates. This explains why studies that use the residual income valuation model to estimate stock price understate stock price on average. The results suggest that the estimation of future price/book premiums is an important component of RI valuation and present a limitation of using accounting numbers to estimate firm value without reference to price.
Author: Julia Nasev
Publisher: Springer Science & Business Media
ISBN: 3834984582
Category : Business & Economics
Languages : en
Pages : 129
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Book Description
Julia Nasev examines the impact of conservative accounting numbers on valuation estimates and on real economic decisions such as cost stickiness.
Author: Karin A. Petruska
Publisher:
ISBN:
Category : Accounting
Languages : en
Pages : 274
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Book Description
Accounting conservatism is often described as an equilibrium reaction used to moderate a decrease in value resulting from information asymmetry, uncertainty, or private information that occurs between investors and managers (LaFond and Watts, 2008). Although a qualitative characteristic of the FASB conceptual framework, standard setters have addressed concerns that accounting conservatism may lack neutrality and can lead to biased firm reporting that misrepresents economic conditions. Based on the theoretical framework of litigation proposed by Watts (2003), I address whether firms with higher thresholds of litigation risk are inclined to use higher levels of asymmetric timeliness as a choice in reducing information asymmetry. The motivation for this study is to extend the concept of accounting conservatism to a setting that investigates firms with egregious levels of litigation risk to determine if they exhibit higher levels of accounting conservatism. In terms of regulation, the Sarbanes-Oxley Act was enacted to increase transparency and disclosure in financial reporting and represents a more transparent shift in the information environment. I examine whether the asymmetric timeliness of earnings and firm-specific measures of accounting conservatism are more pronounced for alleged fraud firms in the post-SOX period, when litigation risk is expected to increase. In terms of standard setting, I examine if goodwill impairment is higher for firms accused of alleged fraudulent activity and whether these firms utilizing goodwill impairment maintain a higher degree of accounting conservatism. I investigate whether accounting conservatism, as a disclosure mechanism, can mitigate an increase in the cost of equity capital, even under the auspices of alleged fraud. Additionally, this study addresses the issue of whether there are contagion effects of asymmetric timeliness for firms in similar industries as the alleged fraud firms. The results suggest that the threat of litigation for alleged fraud firms invokes a higher degree of asymmetric timeliness surrounding the alleged fraud manipulation date in the financial statements vis-á-vis a control sample and is driven by the accrual component of earnings. The degree of asymmetric timeliness of earnings remains higher in the post-SOX period for alleged fraud firms. However, the relation between firm-specific measures of accounting conservatism and the post-SOX period vary depending on the measure used. Goodwill impairment is higher for firms accused of alleged fraudulent activity and the asymmetric timeliness of earnings is greater for alleged fraud firms that utilize goodwill impairment. The relation between accounting conservatism and the cost of equity capital varies as to the measure used to construct the cost of equity capital. This suggests that firms are not able to influence the cost of equity capital through a more conservative disclosure policy. Also, there do not appear to be industry contagion effects. The findings lend support as to the role of accounting conservatism and why the FASB should continue to monitor its increasing effects. The results can provide support to investors, analysts, and academicians in adjusting for the effects of conservatism and to auditors in understanding how accounting conservatism could be used by firms and the multiple ways that it can be measured.
Author: Silvia Ferramosca
Publisher: Springer
ISBN: 9783319735870
Category : Business & Economics
Languages : en
Pages : 265
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Book Description
This book provides a critical analysis of the current state of knowledge on the relationship between family firms and a wide range of accounting choices, including earnings management, accounting conservatism, and financial and non-financial disclosure. In examining the choices made in family firms, the authors explore and elucidate the relevance of agency, socioemotional wealth, stewardship, and resource-based theories. Readers will also find close consideration of the impacts of a country’s culture and societal values on accounting choices. In particular, further evidence is provided on the impact of different cultures on accounting conservatism in family businesses. Finally, avenues for future accounting research on family firms are discussed, highlighting theoretical and empirical challenges. In addition to offering a revealing analysis of the influence of ownership types and cultures on accounting choices within family firms, the book identifies significant practical implications for the management of family firms and policy implications for regulators and standard setters.
Author: Yutao Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 161
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Book Description
Recent studies document that covenant violations intensify the conflicts of interest between lenders and borrowers, and lead to greater restrictions on borrowing firms' financing and investment activities (Chava and Roberts, 2008; Roberts and Sufi, 2009b). Motivated by this literature, I investigate whether accounting conservatism, specifically conditional conservatism, mitigates the adverse consequences of debt covenant violations. I argue that conservative reporting can potentially ameliorate the conflicts of interest between lenders and borrowers. Therefore, I predict that accounting conservatism reduces the adverse impact of covenant violations on borrowers' financing and investing activities and exhibits a positive association with operating and stock market performance after covenant violations. I obtain a sample of 312 violating and 5,327 non-violating firm-quarters observations from U.S. non-financial public firms during the period of 1998 - 2007 to test my hypotheses. Using three measures of conditional conservatism and a composite measure of the three individual measures, I find that the degree of increase in borrowing firms' conservative reporting between loan initiation and covenant violation is associated with smaller reductions in firms' financing and investing activities in the post-violation period. Furthermore, my analyses provide some evidence that firms that increase conservative reporting exhibit better stock market performance, implying that conservative reporting is beneficial for shareholders after covenant violations. I find no evidence that increased accounting conservatism affects operating performance after covenant violations. My results continue to hold after controlling for pre-contracting unconditional and conditional conservatism. Overall, my dissertation provides evidence that conservative accounting practices followed by borrowing firms ease the adverse consequences of debt covenant violations. My dissertation contributes to the emerging literature on the effects of accounting quality on re-contracting outcomes after covenant violations.
Author: Tony Kang
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
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Book Description
Previous research shows that accounting conservatism facilitates debt contracting. Extending this line of literature, we examine whether the role of accounting conservatism in accessing external debt to attain firm growth varies with its maturity. We find evidence of a positive relationship between conservatism and debt maturity. We also observe a positive relationship between conservative accounting and future growth funded by all classes of debt, but this relation is due to long-term rather than short-term debt, which is less prone to agency risk. Further, the associations between conservatism and debt maturity and conservatism and growth financed by long-term debt are mostly observed for firms with fewer anti-takeover provisions in place. These findings suggest that the demand for accounting conservatism is not uniform across different debt maturity horizons.
Author: Mark Bagnoli
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
Managers have sufficient discretion under Generally Accepted Accounting Principles (GAAP) to adopt more or less conservative financial reporting policies. In this paper, we develop a signaling model to provide insight into managers' decisions to be conservative in their accounting. We provide conditions under which the market can use the manager's exercise of discretion to infer her private information about the future prospects of the firm and thus firm value. Under these conditions, we also show that there are meaningful differences between earnings response coefficients for firms whose managers choose a conservative reporting policy and those whose managers do not. Finally, we use our theoretical model to provide intuition for some established empirical results on earnings response coefficients.
Author: Ross L. Watts
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Anthony Simmons
Publisher: Cambridge University Press
ISBN: 1107640709
Category : Business & Economics
Languages : en
Pages : 497
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Book Description
Fully updated to meet the requirements of the revised Study Design, Cambridge VCE Accounting Units 1 & 2 (Second Edition) supports students as they develop the skills necessary to succeed. This market-leading series scaffolds students through the course introducing basic concepts and building on these until students are able to apply their skills to complex exam scenarios. The highly-regarded author team of VCE Accounting examiners provide an authoritative and easy-to-understand narrative on the Units 1 & 2 course. This is supported by Review Questions for each section to consolidate learning, and carefully graded exercises at the end of each chapter that closely resemble the style found in the external exams. Key feature include: • Comprehensive colour coding of specific transactions in the accounting process provides extra visual support for students • Selected answers provided at the back of the text encourage students to work independently.
Author: Yonpae Park
Publisher:
ISBN:
Category :
Languages : en
Pages : 248
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Book Description
