Open Access Perspective Felix and Rebecca, J Account Mark 2015, 4:1 DOI: 10.4172/2168-9601.1000121 J Account Mark ISSN: 2168-9601 JAMK, an open access journal Volume 4 • Issue 1 • 1000121 Keywords: Average annual accrual determine stock returns; Book value infuence stock returns; Non-operating accruals afect stock returns Introduction Te most important source of externally feasible information on companies is the fnancial statement. Despite it widespread use and continuing advance, the concern has been that accounting practice has not kept pace with rapid economic and high technology changes which invariably afect the value relevance of accounting information. Te international accounting standard board for the preparation and presentation of fnancial statement (IASB Framework) says in paragraph 26 that information is relevant “when it infuences the economic decisions of users by helping them evaluate past, present or future events or confrming, or correcting, their past evaluations”. Financial accounting standard board concepts statement No. 2, Qualitative characteristics of Accounting information says in paragraph 47 that, to be relevant, “accounting information must be capable of making a diference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confrm or correct expectations,” and goes on to defne event and outcome. Conservatism has been one of the obvious characteristics of fnancial reporting which have been combined with theory and practice of accounting for long time. According to Watt’s view [1], conservatism has been considered as an outstanding and dominant feature in accounting and fnancial reporting (statements) forum since early twentieth century. Te importance of Conservatism is that managers have considerable discretion in measuring frms’ economic events, as allowed within those accounting regulation. Accordingly, accounting policy of a frm in reporting its fnancial performance is one of the governance mechanisms that enable privately informed and self-interested managers to credibly communicate their private, value-relevant information to market investors. Terefore conservatism can provide value relevant information that has not yet been captured in bottom- line numbers [2,3] it is required that in the management of liquid assets, an organizational policy must be conservative or aggressive. A conservative policy means lower return and risk while an aggressive policy products higher return and risk. But the two important aims are proftability and solvency. In their works, Kothari, Haley and Palepu, Verrechia [4] have extensively reviewed studies examining the relation between accounting information and security prices. Tese studies concluded that fnancial reports provide new and relevant information to investors although the relevant has considerably come down. Brown et al. found that the relation between stock returns, earnings and book values have deteriorated over time. Collins et al., Francis and Schipper, Ely and Waymire [5,6] examine the relation between returns, earnings and book values they conclude that the relation between returns and earnings has deteriorated, but that this has been ofset by an increase in the value relevance of book values. Most of these studies are inconclusive about value of relevance and report that results also depends on variables such as frm characteristics, and country - specifc institutions and is also subject to alternative interpretations. Dontoh et al., [7] suggested that the decline in value relevance is more caused by noise in the stock market rather than accounting numbers. Ball and Shivakumar [8] examined the new information content to the investor using quarterly earnings announcement. Tey fnd that quarterly *Corresponding author: Umanhonlen Ogbeiyulu Felix, Department Banking and Finance, Faculty of Management Sciences, University of Benin, Benin City, Nigeria, Tel: 08035035671; E-mail: ogbeiyulu4real@yahoo.com Received December 22, 2014; Accepted January 10, 2015; Published January 17, 2015 Citation: Felix UO, Rebecca UI (2015) Theory of Conservatism and Value Relevance of Accounting Information. J Account Mark 4: 121. doi: 10.4172/2168- 9601.1000121 Copyright: © 2015 Felix UO, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Theory of Conservatism and Value Relevance of Accounting Information Felix UO 1 * and Rebecca UI 2 1 Department Banking and Finance, Faculty of Management Sciences, University of Benin, Benin City, Nigeria 2 Department of Accountancy, Faculty of Management Sciences, University of Benin, Benin City, Nigeria Abstract This paper is centered on theory of conservatism and value relevance of accounting information in the Nigeria stock ex-change (NSE) and other related literatures. It reviews the relevance of conservatism and value relevance of accounting information and their comparisons. While there have been a number of studies on this topic in the developed countries not much has been explored in Nigeria. Value relevance has been criticized by extant literature and also that conservatism in accounting as one reason for the observed decrease in value relevance. One of such recommendation was that the fnancial reporting council and other allied bodies should ensure clarity and provide rules with probably less discretionary tendencies for management to manipulate. The overall aim is to improve credibility of fnancial information. In order to ascertain the impact of conservatism on value relevance of accounting information, secondary source of data collection, statistical instruments like regression and correlation were used in the analysis of data collected. It was discovered among others that there is the existence of a signifcant inverse relationship between Market-based conservatism (BMCONA) and Earnings per share (EPS) used as a proxy for stock returns for the pooled OLS, fxed and random effects model. The results suggest that higher conservative practices by companies will affect the informativeness of fnancial estimates and declines in stock returns may be seen as an outcome of the markets assessment of disclosure credibility. In concluding this study, some recommendations were made. One of such recommendation was that the fnancial reporting council and other allied bodies should ensure clarity and provide rules with probably less discretionary tendencies for management to manipulate. The overall aim is to improve credibility of fnancial information. Journal of Accounting & Marketing J o u r n a l o f A c c o u n t i n g & M a r k e t i n g ISSN: 2168-9601