Article2009

Earnings Conservatism and Value Relevance Across the Business Cycle

David S. Jenkins · Gregory D. Kane · Uma K. Velury

134 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

Abstract: Prior research has demonstrated higher value relevance of current earnings during economic expansions relative to contractions. We largely attribute such a result to expected growth prospects being captured in the current earnings coefficient when a direct proxy for expected future earnings is omitted from the returns‐earnings model. We demonstrate that the conservatism and value relevance of current earnings is actually higher during economic contractions when including a proxy for future earnings expectations. We further demonstrate that the value‐relevance of expected future earnings is higher during expansions, when the association between historical accounting information and future growth opportunities likely weakens.

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References

1984The Capital Structure Puzzle 1968An Empirical Evaluation of Accounting Income Numbers 1997The conservatism principle and the asymmetric timeliness of earnings1 2003Conservatism in Accounting Part I: Explanations and Implications 2004Costs of Equity and Earnings Attributes 2004Earnings quality in UK private firms: comparative loss recognition timeliness 2003Incentives versus standards: properties of accounting income in four East Asian countries 1999The Boundaries of Financial Reporting and How to Extend Them

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