Abstract
This study evaluated the relationship between market-to-book ratio and Tobin’s Q and accounting conservatism. An important factor in adopting conservative approaches is the increased competitive pressures. Nevertheless, conservative approach reduces expectations of future performance of the businesses. This study used the data from companies listed in TSE during 2008 to 2013. Basu’s model was used to assess conditional conservatism. To evaluate the effect of market-to-book ratio and Tobin’s Q on conditional conservatism, these variables were added to Basu’s model. The tests showed a negative significant relationship between Tobin’s Q and conditional conservatism. However, the results showed no significant relationship between market-to-book ratio and conditional conservatism.
Highlights
Investors constantly and uniformly use accounting information without modifying in terms of changes in accounting methods or considering its calculation
The coefficient of determination indicates that 67% of variations in conservatism can be explained by market-to-book ratio
This study examines the relationship between accounting conservatism and market-to-book ratio and Tobin’s Q
Summary
Investors constantly and uniformly use accounting information without modifying in terms of changes in accounting methods or considering its calculation. The price-to-book ratio is the most important indicator to measure the value and future opportunities of the firm. How to cite this paper: Moghadam, A. and Rahimi, M. (2016) The Study of the Relationship of Conditional Conservatism for the Market-to-Book Ratio and Tobin’s Q. Accounting conservatism refers to different verifiability of good and bad news. Good news is the positive return on stocks or events which lead to increased profits. Bad news is zero or negative return which reduces profit. Conservatism is defined as a procedure to reduce profits and underestimate assets in response to bad news and, to increase profits and overestimate assets in response to good news. Tobin’s Q has been always considered by investors and analysts as an investment measure. Tobin’s Q is based on accounting data and market information. The main objective of this study is to examine the relationship between investment, inventory and capital expenditure for companies listed in Tehran Stock Exchange (TSE)
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