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The effect of differential accounting conservatism on the “over-valuation” of high-tech firms relative to low-tech firms

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Abstract

This paper examines systematic differences in the level of accounting conservatism between high-tech and low-tech firms. Relying on the recent development in theoretical models and empirical measures of conservatism, we investigate conservative accounting practices and earnings management behavior in high-tech and low-tech firms. The results based on comparisons of cumulative nonoperating accruals, regression coefficients from the income timeliness models in Basu (1997), the distribution of earnings, and discretionary accruals between the two groups are consistent with a higher level of accounting conservatism in high-tech firms vis-à-vis low-tech firms. Additional analyses show that the effect of conservatism cannot be used as a defense for the over-valuation of high-tech firms.

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Authors and Affiliations

  1. School of Administrative Studies, York University, Toronto, Ontario, Canada, M3J 1P3

    Sung S. Kwon

  2. Department of Accounting, University of Texas at San Antonio, San Antonio, TX, 78249-0632

    Qin Jennifer Yin

  3. School of Business, Rutgers University–Camden, Camden, NJ, 08102

    Jongsoo Han

Authors
  1. Sung S. Kwon
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  2. Qin Jennifer Yin
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  3. Jongsoo Han
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Correspondence to Qin Jennifer Yin.

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Kwon, S.S., Yin, Q.J. & Han, J. The effect of differential accounting conservatism on the “over-valuation” of high-tech firms relative to low-tech firms. Rev Quant Finan Acc 27, 143–173 (2006). https://doi.org/10.1007/s11156-006-8794-3

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