Seminar
Investment Reversals, Accounting Conservatism and Stock Returns
Accounting
Speaker: | Sonia Konstantinidi, Cass Business School |
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Website: | http://bunhill.city.ac.uk/research/cassexperts.nsf/(expertsbyName)/540F7D301AFACDF18025788C0057E27F?OpenDocument |
Date: | Wednesday 13 May 2015 |
Time: | 14:00 |
Location: | Constantine Leventis Room, Building One |
Further details
Preliminary and incomplete. Please do not circulate or quote without permission
First draft: April 2015 Abstract Prior research shows that a measure of Q-Score, capturing the joint effect of conservative accounting and investment growth, significantly predicts future stock returns. Yet, whether the documented returns reflect compensation for risk or mispricing remains an open question. Under mispricing explanations, investors do not anticipate the reversals of temporary investment growth. In this paper, I show that (i) the predictable stock returns associated with the Q-Score are concentrated among firms with the largest future investment reversals (ii) a parsimonious model that is independent of stock prices can identify future investment reversals ex-ante with reasonable power, (iii) the returns to the Q-Score strategy conditional on ex-ante identifiable future investment reversals are significantly larger than the returns to the unconditional Q-Score strategy, and (iv) analysts’ earnings expectations do not anticipate the predictable investment reversals and are systematically biased. Overall, the results suggest that investors and financial analysts do not anticipate the temporary nature of investment growth under conservative accounting. Keywords: Investment reversals, conservatism, stock returns