Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale: The US Evidence

Abstract

The structural shift in the USA from a tangible- to an intangible-intensive economy raises a concern that reporting based on generally accepted accounting principles (GAAP) might have lost its usefulness to investors. Amir and Lev [(1996) Value relevance of nonfinancial information: the wireless communications industry, Journal of Accounting and Economics, 22(1–3), pp. 3–30] argue that accounting information is not useful for intangible-intensive firms. In contrast, Collins et al. [(1997) Changes in the value relevance of earnings and book values over the past forty years, Journal of Accounting and Economics, 24(1), pp. 39–67] find that the value relevance (measured by R-squared) of accounting information has increased over time and that value relevance for intangible-intensive industries is as high as that for tangible-intensive industries. In this article, we attempt to resolve the above discrepancy by examining the impact of scale on R-squared (Brown, S., Lo, K. and Lys, T. (1999) Use of R2 in accounting research: measuring changes in value relevance over the last four decades, Journal of Accounting and Economics, 28(2), pp. 83–115). We find that, after controlling for scale, R-squared is lower for intangible-intensive industries than for non-intangible-intensive industries and has declined over time for intangible-intensive industries but remained stable for non-intangible-intensive industries. Interestingly, the declining trend ended with the demise of the ‘New Economy’ period (NEP) (Core, J. E., Guay, W. R. and Van Buskirk, A. (2003) Market valuations in the New Economy: an investigation of what has changed, Journal of Accounting and Economics, 34(2–3), pp. 43–67), and value relevance for both industry groups appears to be restored in the post-NEP to the pre-NEP level. We also find that R&D capitalisation increases value relevance for intangible-intensive industries, but does not completely eliminate the gap between the two groups.