The Information Perspective and Usefulness of Accounting Information

Abstract

Relevance of earnings for explaining equity prices is investigated by many value relevance studies. This study investigates whether fiscal year end earnings as a proxy for next period’s earnings have additional information, beyond the information incorporated in contemporaneous equity price, for explaining next fiscal period’s end equity price. Results show that earnings have statistically significant additional information for explaining next fiscal year end equity price, even though the explanatory power of earnings is very low as not considerably supported for model utility. As Ohlson (1995) explores informativeness of fiscal year end earnings as a proxy for next period’s earnings, two alternative models are suggested, where next fiscal year end equity price and price change are considered as the dependent variable and fiscal year end (current) equity price is accommodated as an additional explanatory variable. However, using stationary price change as the dependent variable would be much useful in value relevance studies for econometric reasons. In this context, fiscal year end equity price provides a benchmark to assess additional informativeness of earnings and facilitate the estimated coefficients of earnings to capture and represent the information incorporated in the earnings data.