Value Relevance of Financial Information and Conservatism: High-Tech Versus Low-Tech Stocks

Abstract

This paper provides evidence on systematic differences in the value-relevance of primary accounting variables and the level of accounting conservatism between high- and low-tech firms. Specifically, the results reveal that financial information of high-tech firms reflects lower levels of security price reaction and association than that of low-tech firms. In addition, consistent with findings from prior research, such reaction or difference in reaction of the firm-specific returns is limited to only positive earnings cases. Also, consistent with conservatism hypotheses, high-tech firms reveal greater levels of conservatism in financial reporting during the 1990's than low-tech firms when several conservatism proxies are used. This study also examines the value-relevance of financial information and accounting conservatism concurrently in a regression model and finds that the association, measured in adjusted R2, between cumulative adjusted returns and key accounting variables including operating cash flows, total accruals, sales, and change in sales is still weaker for high-tech firms than for low-tech firms even after negative non-operating accruals (a proxy for accounting conservatism) are curbed. Numerous previous studies have examined the inter-temporal properties of financial numbers, including both value relevance and levels of conservatism. However, to my knowledge, this study is the first to investigate both issues - value relevance of financial information and accounting conservatism - simultaneously from a cross-sectional perspective in a uniquely contrasted setting of New Economy (high-tech) and Old Economy (low-tech) firms for the period of the 1990's, the decade characterized by the dawn of the Information Age furnished with the Internet. Combined, the results of this paper shed light on the importance of approaching the issue of differential value-relevance in relation to the issue of differential accounting conservatism between high- and low-tech firms in order to better explain seemingly overpriced stocks reflected in the New Economy.

Keywords: High-tech; Low-tech Value-relevance; Conservatism; Accruals

JEL Classification: G12, M41, M44