Is the decline in the value relevance of accounting driven by increased conservatism?

This paper examines the association between conservatism and the value relevance of accounting information. We measure conservatism as downward bias in book values and asymmetric timeliness of earnings using approaches developed in Penman and Zhang (2002) and Basu (1997). We examine the relationship between our measures of conservatism and the value relevance of accounting, at an industry level, over a thirty year period from 1975–2004. We find no evidence that increasing conservatism, either unconditional or conditional, is associated with lowered value relevance over time. In fact, we find evidence that increasing unconditional conservatism is associated with a higher level of value relevance of book values. Further, industries with decreasing unconditional conservatism experience a significantly greater decline in the value relevance of book values. High growth industries do see a greater decline in value relevance of earnings than low growth industries, but controlling for growth, there is no evidence that industries with increasing conservatism see a greater decline in value relevance than industries with decreasing conservatism. Taken together, our findings limit the plausibility of attributing decreasing value relevance to increasing conservatism in accounting.