No. 45: Co-movement of price and intrinsic value – Does accounting information matter?

Abstract

We investigate the co-movement of stock prices and intrinsic value estimates focusing on the estimation of risk. We apply risk measurements based on a) market and b) accounting data. We find that price and value co-move from 1983 to 2014 on an index-level using accounting-based risk measurement in contrast to the market-based risk measurement. Our findings have two vital implications. First, the lack of co-movement documented in prior research can alternatively be explained by the applied valuation model (market vs. accounting), rather than investors trading behavior (e.g., speculation). Second this result provides strong empirical evidence that accounting information is useful for equity investors. Finally, we analyze the role of accounting conservatism
regarding co-movement. We document that on an index level conservative reporting harms the co-movement of price and value. However, conditioning on a co-movement of price and value, more conservatism is helpful for moving prices back to fundamentals.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.