Relative Value Relevance Research Articles

Relative and Incremental Value Relevance of Traditional and Real Performance Measures: Evidence from Palestine Manufacturing Listed Companies

Purpose: This study seeks to test both incremental and relative value relevance of the Economic Value-Added (EVA) as a real performance indicator and (EPS) as a traditional performance indicator in the context of the Palestine Exchange (PEX) listed manufacturing companies. Theoretical framework: Previous research provided mixed evidence about the superiority of EVA over the traditional performance measures in predicting market value; some studies supported the superiority of EVA (Zimmerman, 1997; Shishanya et al., 2020), while others denied that superiority (Biddle et al., 1997; Agnatia & Amalia, 2018). Testing the value relevance of EVA compared to EPS was rarely conducted in Palestine. Design/methodology/approach: Seventy company-year observations were gathered from 10 of 13 manufacturing PEX-listed companies over seven years (2015-2021); the study employed regression and correlation analysis. Findings: The study found a significant relationship between EPS and stock returns while concluding an insignificant relationship between EVA and stock returns. The study also found that EPS beats EVA. However, the findings showed that EVA adds incremental information content to EPS’s interpretation of stock returns. Research, Practical & Social implications: The study outcomes help and direct the investors and analysts, in assessing the company’s performance and predicting stock returns; it also helps policymakers and regulators in directing and updating reporting requirements. Originality/value: This study adds to the literature on the value relevance of real and traditional performance indices in Palestine. Further research is recommended on other sectors and the whole market.

증권산업의 NCR제도 개정과 회계정보의 가치관련성

With the revision of the NCR system in 2014, there was a controversy over the predictive power of bankruptcy and the reliability of indicators between the indicators before and after the revision. Therefore this paper compared and analyzed the information usefulness of each indicator in terms of the value relevance. The results of analysis are that the higher the net capital ratio (pre-revision indicator), the higher the value relevance of profit or loss and the lower the value relevance of equity book value, but there was no differentiation in value relevance depending on the level of the net operating capital ratio (post-revision indicator). The typical relationship between financial soundness and value relevance revealed by previous studies is that the higher the soundness, the higher the relative value relevance of profit or loss. Results of this study imply that the net capital ratio has a typical relationship of financial soundness indicators to the value relevance of accounting information. Therefore, it can be seen that the net capital ratio is considered more important than the operating net capital ratio as a proxy for financial soundness in the process of evaluating the firm value by market participants. This study is significant in that it compared and analyzed the usefulness of the securities industry supervisory index from the perspective of the capital market.

Value relevance of general government national accounts with ESA2010 accrual accounting framework. Association of ESA2010 reporting quality with decision making and accounting standardisation

Purpose: The necessity for a reliable set of international standards for the compilation of national accounts introduced the accrual accounting framework of the European System of Accounts (ESA 2010). Extensive efforts are made for convergence between Government Accounts (GA) and National Accounts (NA) under accounting standards. Design/methodology/approach: This study investigated the quality of governmental NA, in the context of ESA 2010, from 1999 through 2019, using relative value relevance models of long-term government bond yields. Findings: i) The accrual accounting framework ESA2010 generates value relevant (thus qualitative) NA financial reporting in EU member states and the United Kingdom (UK); ii) The financial variables that better interpret bonds’ return, thus governments’ necessity to borrow money, are showcased; iii) The usefulness of the ESA2010 conceptual framework for decision and policy making process considering that the accrual accounting basis fosters the financial reporting quality, is demonstrated; iv) The quality results set the premise for further discussion for the harmonization and alignment process of accounting standardisation with the ESA2010 accrual accounting framework as a resource for policy and decision making. Limitations: The methodology of value relevance models that is employed to assess the governmental statistical reporting quality with the ESA2010 accrual accounting framework is a private sector technique. Originality: This study contributes theoretically as it fosters the quality of accrual accounting basis. It moreover provides an empirical and practical contribution by introducing relative value relevance econometric models that provide stakeholders with reliable information on the financial position and performance of the government. It showcases significant financial variables and coefficients of statistical reporting for each government. With its value relevant results, it supports evidence-based decision making, allows comparisons between EU governments and the UK, and contributes to increased transparency and accountability.

Value relevance of book values, earnings, and future earnings: evidence by time, life cycle stage, and market uncertainty

PurposeThe purpose of this study is to investigate the role of book values, earnings, and future earnings in equity valuation by time, life cycle stage, and market uncertainty using samples of USA and Japanese companies.Design/methodology/approachThis study employs Lubberink and Willett (2021) methodology in using log-linear models to estimate the value relevance of accounting numbers and follows Schaberl (2016) approach to measure %incremental value relevance. The study also includes future earnings in a basic valuation model (Ohlson, 1995) to explore the extent to which stock prices are forward looking.FindingsThis study finds a significant increase by time in the relative value relevance of a combined model with book values and earnings and a combined model with future earnings for both countries. However, the incremental value relevance of book values, earnings, and future earnings remain stable over time. The results by life cycle stage indicate that incremental value relevance of future earnings and earnings are more (less) pronounced for firms in the intro (mature) life cycle stage while the incremental value relevance of book values is highest for firms in the decline stage for both countries. The results by market uncertainty indicate that firms with high market uncertainty display higher incremental value relevance of book values for both countries. The results on future earnings are mixed as USA (Japan) firms with high (low) market uncertainty display more (less) incremental value relevance of future earnings.Practical implicationsThe findings in this study enhance the merits of two basic financial statements (balance sheet and income statement) in a firm's equity valuation for potential investors and existing shareholders and document an additional role of future earnings information in reflecting a firm's stock price, which is beyond what book values and current earnings have already contributed.Originality/valueThis is the first study that uses log-linear models to estimate the value relevance of accounting numbers and investigates value relevance of accounting information in three views: time, life cycle stage, and market uncertainty.

Value Relevance of Accounting Information and Noise Trading in Banks and Financial Institutions

This study aimed to analyze the financial accounting information's relative and incremental value relevance between 2012 and 2019. It also analyzed the relationship between noise trading and the value relevance of financial accounting information using 564 firm-year observations on banks and financial institutions in the Indonesia Stock Exchange (IDX) from 2012 to 2019. The price valuation model prepared by Ohlson [1] was used to test the value relevance of accounting information. The findings showed the relative and incremental value relevance of earnings and book value during the study. Furthermore, noise trading has a moderating effect on the earnings' value relevance. The samples used were from the financial sector to compare value relevance from previous literature on manufacturing companies. The results could be useful to current and potential investors while considering investing in the financial sector.

Comparative Value Relevance of Main Accounting Figures in France and the United Kingdom

Abstract The value relevance of financial reports has been the preoccupation of researchers and regulators during the last three decades. Therefore, this study is an attempt to reinvestigate the comparative value relevance of the main accounting figures (equity book value, earning, and cash flow) in two prominent economic and accounting models in the world, France and the UK. Using 115 French companies and 100 UK companies over the period 2011-2019, and relying on Ohlsonʼs model, the results indicated that equity book value and earnings are value-relevant in two countries, but cash flow has no value relevance. In France, the equity book value has low-value relevance versus a high-value relevance of earnings. However, in the UK, equity book value and earnings have close levels of value relevance. Although the differences between French and UK companies in terms of relative value relevance of equity book value and earnings, they have very close common value relevance.

The impact of IFRS adoption on the value relevance of accounting information in Saudi Arabia

AbstractWe examined the joint and relative value relevance of book value of equity (BVE) and earnings before (2015–2016), after (2017–2018) and during the comparative year (2016) of mandatory adoption of International Financial Reporting Standards (IFRS) in Saudi Arabia. Results show that the accounting information is jointly value relevant (R2), with no significant change between accounting information prepared under Saudi GAAP and IFRS. However, we found a positive change in the relative value relevance of the BVE after IFRS implementation, mainly related to the introduction of fair value measurement. Differences in value relevance were found across variances in company characteristics.

The relative and incremental value relevance of goodwill before and after SFAS No. 142

We explore the value relevance of goodwill against two benchmarks: other accounting information and long-lived tangible assets. Prior research suggests that fair value estimates for goodwill must be inferred from other available information because of the nature of goodwill, including its intangibility. Such inferences are highly discretionary and may limit the usefulness of reported goodwill estimates. Because Statement of Financial Accounting Standards (SFAS) No. 142 relies exclusively on fair value estimates to subsequently measure goodwill, reported values considering management’s increased discretion may be less reliable and less value relevant when presented in conjunction with other accounting information. However, the subsequent accounting measurement for goodwill is not dissimilar from the subsequent measurement for long-lived tangible assets, which are also subject to impairment. In general, impairment measurement is subjective; management may have greater insight, even in the presence of management incentives and other accounting information, that may help confirm or disconfirm investors’ own goodwill estimates. Using other accounting information and long-lived tangible assets as benchmarks for the value relevance of goodwill, we find that reported goodwill provides greater value relevance relative to other accounting information after SFAS 142 and that the difference between the value relevance of goodwill and other long-lived tangible assets is also significantly greater following SFAS 142.

The consequence of earnings management through discretionary accruals on the value relevance in Saudi Arabia

This study explores the relationship between company earnings management and the relative value relevance of book value and earnings. The differential effect on the value relevance of earnings mana...

The value relevance of fair value and historical cost measurements during the financial crisis

AbstractThe roles played by fair value (FV) and historical cost (HC) measurements during the financial crisis (2008–2009) remain controversial. We investigate the relative and incremental value relevance of assets and liabilities measured at FV and HC for financial institutions from 25 European countries before and during the financial crisis. We find that FV is more relatively value relevant than HC during the crisis but not before. HC and FV are, however, incrementally value relevant to each other both before and during the financial crisis. Our results are influenced by cross‐country differences.

Konvergensi IFRS di Indonesia: Apakah Relevansi Nilai Relatif dan Inkremental Informasi Akuntansi Terdampak?

This paper investigates whether the value relevance of earnings information and equity information have changed as the IFRS (International Financial Reporting Standard) convergence taken place in Indonesia. The qualitative characteristic is viewed in the perspective of relative value and incremental value relevance. Theoretically, the earning’s value relevance should increase, and equity lost its value relevance pursuant the IFRS convergence. The financial data of manufacturing companies in Indonesian Stock Exchange during 2008-2016 were sorted purposively based on companies with complete financial statement and stock price data during 8 consecutive years. This study uses regression analysis to test the hypotheses. It was found that earning and equity information contain value relevance. Moreover, there is no evidence to support the hypotheses that IFRS convergence decrease earning’s value relevance and decrease equity’s value relevance.

Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms

This paper provides a comprehensive evidence on how product and market dynamics affect the value relevance of trade payables. Using a sample of 2559 UK listed firms over the period 2005–2014, we find a positive relationship between trade payables and firm performance. Our evidence suggests that trade payables increase (decrease) performance in firms with differentiated products and demand uncertainty (larger market share). We demonstrate that the relative value relevance of bank credit versus suppliers’ credit is dependent on the nature of the product, the level of sales volatility, and market share. We use an innovative approach to assess the robustness of our results to omitted variable bias.

The Influence Of Firm’s Fair Value System On Earnings Quality Under IFRS

This paper analyzes the influence of firms’ fair value system on earnings quality under IFRS. Korean firms are required to adopt IFRS in 2011. IFRS adoption was expected to increase value relevance of book value of equity and benefit information users’ decision making. However, prior Korean studies report that value relevance of book value of equity is indifferent between under K-GAAP and IFRS. We consider that the indifference in value relevance of book value of equity after IFRS adoption is due to different level of fair value system among firms. We investigate whether the different level of fair value system among firms lead to the difference in earnings quality. Furthermore, we examine how each firm’s fair value system affect earnings quality under IFRS.
 This study finds following results. First, firms with weak fair value system smooth income more frequently. Second, firms with weak fair value system experience small amount of positive profit and slight increase in net income compared to prior period more frequently. Third, firms with weak fair value system make less timely loss recognition. Lastly, book value of equity and goodwill has low relative value relevance for weak fair value systemic firms, while both book value of equity and goodwill have incremental value relevance for firms with strong fair value evaluation system.

International Financial Reporting Standards Adoption and Value Relevance of Financial Information of Quoted Healthcare Firms in Nigeria

International Financial Reporting Standards (IFRS) was first adopted in 2005 by European Union countries while Nigeria mandatorily adopted in 2012 to participate in opportunities offered by globalization. This study, therefore, investigated the impact of IFRS adoption on the value relevance of financial information of quoted Healthcare Firms in Nigeria. The study conducted a pre (2008-2011) and post (2012-2015) IFRS analyses on six Healthcare firms quoted on the Nigeria Stock Exchange. The study sourced data on Earnings per Share (EPS), Change in Earnings per Share (CEPS), Book Value per Share (BVPS) and Share Price (SP) from published annual reports of the quoted Healthcare firms and Cashcraft Asset Management. Using the Multiple regression model the study revealed that Pre- IFRS financial information is value relevant; Post-IFRS financial information is also value relevant; and Post-IFRS financial information has relative value relevance over Pre- IFRS financial information.

Performance Balance between Sectors in the Insurance Company and Firm’s Value

본 논문은 보험회사의 보험영업부문과 투자영업부문의 성과 간 균형에 대한 정보가 가치관련성을 가지는지 여부를 분석하였다. 가설을 검정하기 위하여 손해보험회사의 부문 간 성과의 균형정도를 계량화한 변수를 개발하여 해당 변수에 대한 증분적 가치관련성과 상대적 가치관련성의 존재여부를 조사하였다. 연구표본으로는 국내 상장보험회사들의 최근 17개 연도의 주가자료와 재무자료 및 기타 기업특성에 대한 자료를 이용하였다. 분석결과, 보험회사의 순이익은 유의적인 가치관련성이 발견되지 않았으나 보험영업과 투자영업부문 간 성과의 균형정도와 기업가치 간에는 유의적인 양(+)의 연관성이 있음을 발견하였다. 이러한 연구결과는 보험회사의 경우 이익의 최종집계치인 당기순이익보다 각 부문별 이익의 균형정도가 더 큰 의미를 지니고 있음을 나타내는 결과이다. 결과적으로, 이 논문은 보험회사의 이익정보에 분명한 가치관련성이 존재한다는 것에 대한 실증적 증거를 제시하였으며, 이익의 질에 대한 또 다른 차원의 척도를 제시하였다는 점에서 선행연구와 차별화된 공헌점을 가진다.This paper analyzed whether the information on the balance between the insurance and investment sector performance of insurer has a value relevance. To test the hypothesis, this paper developed a variable that quantifies the balance of performance between two sectors and tested weather there is a incremental and relative value relevance of developed variable in this study. As research samples, this paper used data of stock price data, financial and other characteristics data of listed insurance companies in Korea for the last 17 years. As a result of analysis, this paper found that there is a significant positive correlation between the insurance company’s performance balance and the firm’s value, but no significant value relevance was found on insurance company’s net profit. These results show that performance balance have more meaningful than total amount of profit. Consequently, this study provide us with evidence of the fact that profit information of insurance company obviously has a value relevance and present a new measure of earnings quality. In this regard, this paper has a differentiated contribution from previous studies.

Product Differentiation, Market Dynamics and the Value Relevance of Trade Payables: Evidence from UK Listed Firms

This paper provides a comprehensive evidence on how product and market dynamics affect the value relevance of trade payables. Using a sample of 2,559 UK listed firms over the period 2005-2014, we find a positive relationship between trade payables and firm performance. Our evidence suggests that trade payables increase (decrease) performance in firms with differentiated products and demand uncertainty (larger market share). We demonstrate that the relative value relevance of bank credit versus suppliers’ credit is dependent on the nature of the product, the level of sales volatility, and market share. We use an innovative approach to assess the robustness of our results to omitted variable bias.

The Relative Value Relevance of Total Comprehensive Income and Net Income －Focus on Consolidated Financial Statements－

The Relative Value Relevance of Total Comprehensive Income and Net Income －Focus on Consolidated Financial Statements－

IFRS convergence and revisions: value relevance of accounting information from East Africa

PurposeThe purpose of this paper is to examine the relative value relevance of accounting information arising from the adoption of converged and revised International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) in East Africa.Design/methodology/approachThe research applies “same firm year” design for identification of the effects of changes in accounting standards. A model similar to Ohlson’s price model and random-effects GLS are used to estimate R2 of the regressions of share prices on book values and earnings.FindingsThe results show that accounting information prepared from revised and converged IAS/IFRS display higher value relevance and also increased following the revision and convergence of IAS/IFRS. The cross-product term is more significant in the post-revision/convergence period thus providing further evidence for increased value relevance after the revision of IAS/IFRS. The results are robust to various models and show that value relevance in East Africa is relatively lower than that of the developed markets.Originality/valueThe current study provides empirical evidence that value relevance increases with converged/revised IAS/IFRS based on quasi natural experimental setting in East Africa. The authors also extend the debate on whether value relevance is relevant in emerging markets, which are regarded as imperfect markets with few regulations, weak enforcement and limited sources of information. The results may be useful to accounting preparers, regulators, investors, standard setters and countries seeking to adopt IAS/IFRS in developing countries.

Have accounting numbers lost their value relevance during the recent financial credit crisis?

Abstract The objective of this paper is to examine the relative and incremental value relevance of cash flows from operations (CFO) around the recent financial credit crisis (pre, during, and post crisis periods). Based on a sample of UK FTSE 350, the study reassures the accounting literature that accounting numbers have not lost their value relevance over time. In particular, the findings show a significantly incremental association between firms’ market values on one hand, and book value (BV), Earning Per Share (EPS) and CFO, on the other hand, over all intervals examined. Further, the study provides new evidence that CFO has relative value relevance to both BV and EPS over all periods (pre, during, and post credit crisis period) to explain the cross variations in firms’ market values. Finally, our findings provide strong evidence about the superiority of the value relevance of CFO over the cash flows from investing and financing activities although the cash flows from investing activities reveal a higher explanatory power in the crisis period. The results provide great insights for the extant literature and reaffirms the usefulness of accounting information in making investment decisions.

Evolution of financial reporting of life insurers

PurposeThis paper aims to examine the capital market effects and predominance of unregulated embedded value (EV) financial reporting in the life insurance industry in foreign domestic markets, and US markets for foreign firms that cross-list in the USA.Design/methodology/approachRecent empirical archival data are analyzed and evaluated to determine the incremental and relative value relevance of an unregulated valuation metric that is disclosed by life insurers.FindingsThe findings support the proposition that EV is valuable supplemental information in foreign domestic markets, and in US markets for foreign life insurers that cross-list in the USA. Given that International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are engaged in projects to improve accounting standard for insurance companies, and have faced criticism with the existing drafts on this issue, the two institutions ought to consider the valuation relevance of EV disclosures. Moreover, this analysis strongly suggests that financial analysts in the USA should consider EV in valuing life insurers’ stocks.Practical implicationsThe findings discussed in this paper are of special interest to financial reporting policy makers, financial analysts, firm compensation committees and managers, and academics.Originality/valueThis paper contributes to the extant literature by providing recent evidence that suggests that EV, an unregulated fair value market-driven metric, is more value-relevant than traditional earnings metrics such as earnings and book value. It is the only study that we are cognizant of that critically examines the recent empirical literature on this evolving issue.