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 over the 1975 through 2004 period. We measure conservatism using approaches developed in Penman and Zhang, The Accounting Review 77:237-264, (2002) and Beaver and Ryan, Journal of Accounting Research 38:127-148, (2000) and value relevance using (1) adjusted R (2) from regressions of price on earnings and book values, (2) adjusted R (2) from regressions of returns on earnings and changes in earnings, and (3) returns earned by perfect foresight of earnings and book values. We find no evidence that firms with increasing conservatism exhibit greater declines in value relevance. Rather, we observe most significant declines in value relevance for firms where conservatism has not increased. When we adjust financial statements for the effects of conservatism, we find that the value relevance of adjusted numbers is generally lower and trends in value relevance unaffected. Based on these results, it is implausible that increasing conservatism drives the decline in value relevance.