Publication detail

Accounting Conservatism and Transitory Earnings in Value and Growth Strategies

Author(s): Jiří Novák M.Sc., Ph.D., Deloitte Corporate Chair, Hamberg, Mattias
Type: Articles in journals with impact factor
Year: 2010
Number: 37
ISSN / ISBN: 0306-686X
Published in: Journal of Business Finance and Accounting
Publishing place: United Kingdom
Keywords: market efficiency, value strategy, growth strategy, earnings-to-price, book-to-market, transitory earnings, accounting conservatism
JEL codes: G14
Suggested Citation:
Grants: 402/09/P154 Financial risk measurement for evaluating stock market efficiency IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development
Abstract: The value premium earned on value and growth investment strategies increases after adjusting for transitory earnings and for the accounting conservatism bias in the book value of equity. Simple investment strategies based on earnings-to-price (E/P) and book-to-market (B/M) performed on the Swedish stock market between 1980 and 2004 generate an annual value premium of 11 to 14 percent. Adjustments for transitory earnings and for the conservatism bias increase the value premium by 2 to 4 percentage points, and at the same time they improve the consistency of earning it. These results suggest that transitory earnings and accounting conservatism introduce noise into E/P and B/M measures. Adjusting for these accounting characteristics makes the identification based on E/P and B/M more effective.

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