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.