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dc.contributor.authorKim, Jae B.
dc.contributor.authorNekrasov, Alexander
dc.contributor.authorShroff, Pervin K.
dc.contributor.authorSimon, Andreas
dc.date.accessioned2019-08-21T16:00:36Z
dc.date.available2019-08-21T16:00:36Z
dc.date.issued2018-10-26
dc.identifier.issn0823-9150
dc.identifier.other10.1111/1911-3846.12465
dc.identifier.urihttp://hdl.handle.net/10027/23897
dc.descriptionCopyright @ Canadian Academic Accounting Associationen_US
dc.description.abstractWe examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross-sectional analysis suggests that more sophisticated analysts and superior long-term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts’ earnings forecasts are negatively associated with the degree of conservatism, i.e., analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings-based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts’ target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.en_US
dc.description.sponsorshipWe gratefully acknowledge the financial support provided by Lehigh University, the University of Illinois at Chicago, the University of Minnesota and Singapore Management University.en_US
dc.language.isoenen_US
dc.publisherCanadian Academic Accounting Associationen_US
dc.subjectConservatismen_US
dc.subjectvaluationen_US
dc.subjectanalyst target priceen_US
dc.subjectmispricingen_US
dc.titleValuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts’ Target Pricesen_US
dc.typeArticleen_US
dc.identifier.citationKim, J. B., Nekrasov, A., Shroff, P. K., & Simon, A. (2019). Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts' Target Prices. Contemporary Accounting Research. doi:10.1111/1911-3846.12465en_US


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