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

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. Copyright Springer Science + Business Media, LLC 2006High-tech, Low-tech, Conservatism, Earnings management,

The Sarbanes-Oxley Act and Accounting Quality: A Comprehensive Examination

“…This TECH variable is equal to 1 for firms which belong to the sample of technology firms. Based on the theory the expectation is that technology firms are more conservative (Kwon et al, 2006 In summary, the findings regarding the conservatism hypothesis are only partially as expected. Our findings indicate that there is an increase in conservatism shortly after the enactment of SOX for the entire sample.…”

“…Evidence found by Kwon et al (2006) reveals that technology based firms are more conservative compared to non-technology firms, thus providing evidence for higher accounting quality. However, with respect to the other quality measures no prior evidence is available; therefore the hypothesis regarding this question is also formulated www.ccsenet.org/ijef …”

“…One of the few studies dealt with this issue (Kwon et al, 2006) showed that high-tech firms have a higher degree of accounting conservatism in their earnings figures than low-tech firms. One possible explanation for this difference is that accounting standards mandate high-tech firms to apply more conservative standards.…”

“…Besides, the higher volatility of high-tech stocks makes these firms more vulnerable to shareholder litigation. High-tech firms also attract more attention from analysts because of their high growth potential, thus they may become incentivized to report more prudently (Kwon et al, 2006). While the reporting requirements for technology based firms are substantially different from non-technology ones, they may also differ on other measures of accounting quality (Aboody and Lev, 1998;Kallapur and Kwan, 2004).…”

“…Prior research has already shown that technology firms are, ceteris paribus, more conservative than non-tech firms (Kwon et al, 2006). Yet less is known about the difference in earnings management and value relevance between these types of firms.…”