Accounting Valuation and Current Cost Disclosures: The Case of Mexico

Abstract

This study investigates the relation between the market value of publicly traded Mexican firms and their disclosures of accounting information adjusted for changing prices. The volatile hyperinflationary environment in Mexico provides an ideal setting for investigating the value relevance of inflation accounting disclosures. Specifically, I investigate the only accounting information that is required in the body of the financial statements: general price level-adjusted and current cost disclosures. Extending the work of Edwards and Bell (1961) and Ohlson (1995), I estimate a valuation model that relates inflation accounting disclosures to firm value. The results indicate that general price level-adjusted and current cost disclosures explain a significant portion of the cross-sectional variation in the market value of Mexican firms. Further, the explanatory power of holding gains is robust to inflation rates that vary from 130% to 20%. These results suggest that current cost and constant peso disclosures are relevant for determining firm value over a wide range of inflation rates.