Abstract
This study examines the impact of SFAS 106 on the value relevance of earnings and book value. Our results show that in the adoption year, investors tend to ignore earnings in the valuation of firms adopting the immediate recognition method and rely mostly on book. However, in the year following the adoption of SFAS 106, earnings under immediate recognition method regain its value relevance. We also find that the choice of accounting method (immediate versus deferred recognition) has no significant effect on the total valuation of the firm, and this finding supports the theory posited by Ohlson and Zhang(1998). Lastly, by comparing the value relevance of earnings and book value for the period prior to and after the adoption of SFAS 106, our results suggests that the implementation of SFAS 106 improves the value relevance of financial reporting, and in particular, enhances the quality of earnings.
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