Rev Quant Finan Acc (2006) 27:143–173
The effect of differential accounting conservatism
on the “over-valuation” of high-tech ﬁrms relative to
Sung S. Kwon · Qin Jennifer Yin · Jongsoo Han
Springer Science + Business Media, LLC 2006
Abstract This paper examines systematic differences in the level of accounting con-
servatism between high-tech and low-tech ﬁrms. Relying on the recent development in
theoretical models and empirical measures of conservatism, we investigate conserva-
tive accounting practices and earnings management behavior in high-tech and low-tech
ﬁrms. The results based on comparisons of cumulative nonoperating accruals, regres-
sion 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-`a-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.
There have been debates on whether stock prices in the late 1990s represent a bubble.
One consensus seems to be that high-tech stocks are more overpriced than low-tech
stocks. Even several years after the stock market started to decline, most tech stocks
are still expensive (Greenberg, 2003; Smith, 2002). Despite these assertions, it is not
clear whether or why high-tech ﬁrms are more overvalued than low-tech ﬁrms.
S. S. Kwon
School of Administrative Studies, York University, Toronto Ontario Canada M3J 1P3
Q. J. Yin (
Department of Accounting, University of Texas at San Antonio, San Antonio, TX 78249-0632
School of Business, Rutgers University–Camden, Camden, NJ 08102