Does an End of Period's Accounting Variable Assessed have Relevance for the Particular Period?

Abstract

Ohlson (1995) indicates how a firm’s current earnings can be a proxy for its future earnings potential in the equity valuation model. It is notable that equity price – earnings relationship in value relevance studies explores the relevance of earnings to indicate a firm’s future earnings, not the relevance for a particular period’s earnings. This explanation provides three scenarios how empirical explanations are related to consider current earnings as a proxy for future earnings, not as a periodic measure as a whole, in empirical models. This proxy role of current earnings possibly implies that a particular period’s earnings, on a stand-alone-basis, explain not only the end of period’s price but also subsequent periods’ equity prices. Further, assessing relevance of a periodic accounting variable in the same (periodic) context is important in modelling, if the accounting practice for the accounting variable needs empirical clarification or justification in relation to equity price.