Accounting Cluster Seminar: Dr Peter Vassalo
We demonstrate, both analytically and empirically, that the manner and degree to which the accounting system records change in enterprise value depends upon both the sign (positive vs. negative) and source (generated vs. contributed) of the value change. Absent accounting conservatism, the accounting measure, enterprise profit after tax, equals the cum-distribution change in enterprise market value generated during the period (i.e., generated value change). Changes in enterprise value can also occur through contributions from/distributions to the owners of the firm (i.e., contributed value change). We show that accounting conservatism differentially records these two sources of value change, leading to differences between accounting and market-based measures of enterprise performance. Our empirical approach identifies both conditional and unconditional conservatism in the same regression framework. This allows us to identify empirical manifestations of accounting conservatism that are quite different from those in the extant literature.