This study examines the effects of accounting conservatism
on equity mispricing. We adopt Basu’s and Khan and Watt’s C_Score models to
measure accounting conservatism and use EBO and RKRV valuation models to
calculate a stock’s intrinsic value. Additionally, we consider the effects of
the corporate life cycle on the above relationship. The findings show that
investors would make more positive valuations if a company has a high
accounting conservatism in the previous period. Second, accounting conservatism
has a deferred and positive effect on equity valuation. Third, the equity value
of a company at the growth stage tends to be overvalued, while that of a
company in maturity stage is likely to be undervalued. Finally, accounting
quality impacts equity valuations, i.e. the better, then the less undervalued
it is. Overall, we provide the evidences that accounting conservatism does
matter to equity valuation, especially with the change of corporate life cycle.
Keywords: Accounting conservatism, Equity
valuation, Corporate life cycle, Accounting quality, Mispricing.