Do conservative accounting methods cause conservative market values?
For publicly owned corporations that have active trading in their securities, the general answer would seem to be no. Many businesses select conservative accounting methods to measure profit, which results in conservative book values for their assets and liabilities. On occasion even conservative methods can cause opposite effects (i.e., higher earnings) in a particular year because of such things as LIFO liquidation gains in that year. The evidence suggests that securities markets take into account differences in profit measurement methods between companies in determining stock market values. In other words, the market is not fooled by differences in accounting methods, even though earnings, assets, and liabilities are reported by different methods of accounting from company to company. To be honest, this is not an easy general conclusion to prove. There are exceptions, but not on any consistent basis. Overall, differences in accounting methods seem to be adjusted for in the marketpla
