Is there a priced risk factor associated with conservatism?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)545-561
Journal / PublicationJournal of Risk Finance
Volume17
Issue number5
Online published21 Nov 2016
Publication statusPublished - 2016
Externally publishedYes

Abstract

Purpose - García Lara et al. (2011) argue that there is a conservatism-related priced risk factor in US stock returns. To put this to the test, the authors aim to analyze whether the conditional conservatism effect comes from the loading on a conditional conservatism-related factor-mimicking portfolio (systematic risk) or the conservatism characteristic itself. 
Design/methodology/approach - The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis et al. (2000). 
Findings - The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor. 
Originality/value - This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by García Lara et al. (2011).

Research Area(s)

  • Conservatism, Mispricing, Risk

Citation Format(s)

Is there a priced risk factor associated with conservatism? / Lopatta, Kerstin; Canitz, Felix; Fieberg, Christian.
In: Journal of Risk Finance, Vol. 17, No. 5, 2016, p. 545-561.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review