Equity Valuation and Current Cost Disclosures: the Case of Mexico

Abstract

This study uses an accounting‐based valuation model to investigate the relation between the market value of publicly traded Mexican firms and their disclosures of price‐level adjusted accounting information. The model is estimated on a sample of Mexican companies during 1987–1990, when annual inflation rates in Mexico decreased from 130 per cent to 20 per cent. The results indicate that general price level‐adjusted and current cost disclosures explain a significant portion of the cross‐sectional variation in the market‐to‐book ratios of the sample firms. Further, the explanatory power of holding gains is robust to decreases in the general level of inflation, which suggests that current cost and constant peso disclosures are relevant for determining firm value over a wide range of inflation rates. These results are particularly important now since the Mexican Institute of CPAs has proposed eliminating the measurement of holding gains in order to make Mexican financial statements more comparable to US and Canadian GAAP.