Disclosure-Derived Financial Statement Adjustments in Equity Valuation

Abstract

In this paper, we assess the equity value relevance of disclosure-derived financial statement adjustments. In price levels and returns tests, we find that reported financial numbers have relatively superior explanatory power over adjusted numbers. Only when adjustments are included along with reported numbers in pricing regressions do adjustments retain significant explanatory power. Our results suggest that for summary valuation inputs like operating profitability, assets, and liabilities, analysts should not substitute adjusted numbers for reported numbers; rather, the information in a subset of adjustments should be used along with reported numbers to produce more accurate valuations.