Beyond Accounting and Back: An Empirical Examination of the Value-Relevance of Accounting Data and "Other Information"

• In Event: Reception with ELS Posters
  In Poster Session: Research Poster Session I and Friday Reception

Abstract

The Ohlson (1995) model provides a representation of firm value in terms of accounting fundamentals and “other” forward-looking information (νt) not yet reflected in accounting numbers. Based on this framework, this paper proposes a measure of proportional relevance (R2%) to examine the relative weight that investors assign to accounting data vs. “other” information (νt). Using this metric, this study seeks to address the following questions: i) has the mix of information used by investors changed over time, and ii) is there a relationship between the overall market conditions and the proportional relevance of accounting data and νt. This study finds that the proportional relevance of “other” information increased substantially over the period 1984–2010. Moreover, the results suggest that investors rely more heavily on accounting data (“other” information) during bearish (bullish) years with high (low) levels of volatility in capital markets. Overall, the results reported in this study suggest that although “other” non-accounting information has gained in importance over time, investors still rely on accounting data as an anchor for valuation in difficult years. Despite the large body of literature on value-relevance, there has been little discussion about the extent to which investors rely on accounting data relative to “other” information captured by earnings expectations. This paper attempts to contribute to this literature by using a more comprehensive empirical specification which, in contrast to prior studies, also includes “other” information. In light of the repeated claim that financial statements have lost their relevance and the currently ongoing deliberations by the PCAOB as to whether auditors should provide assurance on other information currently beyond the domain of US-GAAP financial statements, understanding what determines the extent to which investors rely on accounting data, as opposed to “other” information, is likely to be of interest to a wide audience comprising academics, practitioners, and standard setters.

Author

• Philipp Schaberl, University of Denver