An empirical investigation of conservatism in book value measurement

Abstract

Outlines the role of the conservatism inherent in generally accepted accounting principles in Ohlson’s (1995) and Feltham and Ohlson’s (1995) valuation models and compares it with other research findings. Identifies potential sources of conservatism (e.g. expensing advertising costs, providing for deferred tax etc.), develops a mathematical model and applies it to 1980‐1994 US data to examine their relative importance. Finds that intensity of R&D and age of fixed assets are the most significant and goes on to compare the effectiveness of the Feltham/Ohlson conservatism parameter in capturing this information. Shows that their linear information models seems to capture different aspects of the relationship between book and market values and calls for further research.