Value Relevance Studies Research Articles

The value relevance of SAM's corporate sustainability ranking and GRI sustainability reporting in the European stock markets

This paper investigates whether relative corporate sustainability as measured by the SAM sustainability ranking and sustainability reporting in terms of Global Reporting Initiative (GRI) application levels are associated with a higher market valuation. We conduct a value relevance study for the 600 largest European companies with the Feltham and Ohlson valuation model as a reference point. Our results indicate that for the observation period 2001 to 2011, the association between corporate sustainability and market value is positive. The empirical evidence of a positive relationship between GRI reporting and market value is statistically significant in some but not all of the model specifications. We find no evidence of interaction between the value relevance of corporate sustainability and sustainability reporting, nor do we find any positive effect of external assurance on the capital market perception of GRI application levels. Our results support the notion that conducting business in accordance with ethical norms is also a shareholder value‐increasing business strategy. However, it is not possible to verify the information given in sustainability reports through external assurance.

Issues in Cross-Country Value Relevance Studies: Reply to Wilkins

Issues in Cross-Country Value Relevance Studies: Reply to Wilkins

Market Size: The Unheralded Driver of Value Relevance Differences in Cross-Country Studies?

This paper sheds light on the sensitivity of findings in comparative (international) value relevance studies in regards to two fundamental methodological choices: We argue (and find) that both model choice (the regression vs. the portfolio returns specification) and return window choice are not arbitrary. They have an impact on country rankings and the significance of cross-country differences in comparative designs. Findings with respect to return window choice are likely to be explained by comparative international value relevance studies not only testing for the relevance and reliability of accounting information, but also jointly testing the hypothesis that accounting information is processed similarly across countries. Our results indicate that this joint hypothesis does not always hold and that, thus, previous comparative studies might have overstated accounting quality differences across countries. The findings are based on a treatment sample of 56,000 firm-year observations from 12 countries and from 12 matched U.S. control samples, with observations from 1988 and 2007, respectively.

Comparative Value Relevance Studies: Country Differences Versus Specification Effects

This paper sheds light on the sensitivity of findings in comparative international value relevance studies regarding two fundamental methodological choices. We hypothesize and find that, first, using the regression vs. the portfolio returns specification and, second, the choice of the return window, is not arbitrary. Both choices will have an impact on country rankings and the significance of cross-country differences in comparative designs. This makes us conclude that findings in previous comparative international value relevance studies are partly driven by differences in market characteristics across countries. Extending the findings of Francis and Schipper (1999) and Collins and Kothari (1989), our results suggest that previous comparative studies might thus have overstated value relevance differences and institutional variables' power to explain these differences across countries. Findings are based on a treatment sample of 56,000 firm-year observations from 12 countries and from 12 matched U.S. control samples, with observations from 1988 to 2007.

“Comparative Value Relevance Studies: Country Differences Versus Specification Effects” by Stefan Veith and Jorg R. Werner

“Comparative Value Relevance Studies: Country Differences Versus Specification Effects” by Stefan Veith and Jorg R. Werner

Goodwill Accounting: A Review of the Literature

In this paper we provide a review of the empirical literature on the accounting for goodwill. We focus on research undertaken since the introduction of the "impairment-only approach" of SFAS 141/142 and IFRS 3/IAS 36 (rev. 2004). We distinguish three areas of work. The first area comprises studies on purchase price allocations and the determination of goodwill. The second comprises studies that analyze whether goodwill should be interpreted as an asset, especially value relevance studies and studies on the predictive value of goodwill. The third area of research is the subsequent measurement of goodwill. Here, we discuss, inter alia, studies on the determinants and on the timeliness of goodwill impairments. Finally, we summarize findings on the influence of earnings management on goodwill accounting. Despite the multitude of studies, the available evidence does not allow for an unambiguous answer to the question whether the decision-usefulness of goodwill information has improved or deteriorated following the introduction of the impairment-only approach. One reason for this is that direct comparisons of the situations before and after the introduction are problematic because in the early period companies under US GAAP could apply the pooling-of-interests method, and in many European countries companies could set off goodwill to reserves. The paper closes with look at avenues for future research on goodwill accounting.

Accruals: An overview

The paper provides a broad discussion of the topic “accruals”. Though much of what is said is familiar from the literature on accruals, the paper tries to develop concepts and show how theses forge tight links across a variety of themes. The starting point of the analysis concerns the construct of an accrual. The case is made that it should rest solely on consecutive balance sheets and the splitting of assets/liabilities into (i) cash and approximate cash, assets/liabilities and (ii) all other kinds of assets/liabilities. Given this divide of assets/liabilities one can measure the components in the foundation equation: cash earnings+net accrual=comprehensive earnings. The paper then proceeds to discuss how the net accrual relates to growth in a firm’s operating activities and the extent to which it can be informative or misleading. This topic in turn integrates with the issue of a firm’s quality of earnings and the role of accounting conservatism. Among the remaining topics, the paper discusses how one conceptualizes diagnostics to assess whether or not a period’s accrual is likely to be biased upwards or downwards. It gives rise to a consideration of how one constructs accruals that may be more informative than GAAP accruals and the role of value-relevance studies to assess the information content of accrual constructs. The paper ends with a list of suggestions how future research may be modified in light of the discussions in this paper.

Capital Market Effects of the IFRS Adoption for Separate Financial Statements: Evidence from the Italian Stock Market

Based on a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors and whether IFRS are more value-relevant than domestic GAAP. This issue is key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements.Findings provide evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP are more value-relevant than IFRS.Finally, this paper documents the important role of model specification in value-relevance studies.

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.

The Value Relevance of SAM's Corporate Sustainability Ranking and GRI Sustainability Reporting in the European Stock Markets

This paper investigates whether relative corporate sustainability as measured by the Sustainable Asset Management (SAM) sustainability rating and sustainability reporting in terms of Global Reporting Initiative (GRI) application levels are associated with a higher market valuation. We conduct a value relevance study for the 600 largest European companies with the Feltham and Ohlson (1995) valuation model as a reference point. Our results indicate that for the observation period 2001 to 2011, the association between corporate sustainability and market value is positive. The empirical evidence of a positive relationship between GRI reporting and market value is statistically significant in some but not all of the model specifications. We find no evidence of interaction between the value relevance of corporate sustainability and sustainability reporting, nor do we find any positive effect of external assurance on the capital market perception of GRI application levels. Our results support the notion that conducting business in accordance with ethical norms is also a shareholder value-increasing business strategy. However, it is not possible to verify the information given in sustainability reports through external assurance.

IMPACTO DO PROCESSO DE CONVERGÊNCIA ÀS NORMAS INTERNACIONAIS DE CONTABILIDADE NA RELEVÂNCIA DAS INFORMAÇÕES CONTÁBEIS

Law 11.638/07 marked the start of a series of changes in the laws that regulate Brazilian accounting practices. The main reason for these changes is the convergence process of local with international accounting standards. As a result of Law 11.638/07, the legal precedent was established to achieve convergence. In that context, the aim of this study is to analyze the impact of the convergence process with international accounting standards on the relevance of financial information, based on data for 2007, without and with the alterations Law 11.638/07 introduced and according to the CPC Pronouncements, applicable as from 2008 onwards. Therefore, a value relevance study is used, applying regression analysis to annual stock price information (dependent variable) and net profit per share (NPPS) and net equity per share (NEPS) as independent variables. The main results show that financial information on NPPS and NEPS for 2007, with and without the legal alterations, are relevant for the capital market. A comparison between both regressions used in the analysis, however, shows an information gain for financial information that includes the changes introduced in the first phase of the accounting convergence process with the international standards.

The Value Relevance of Corporate Sustainability and Sustainability Reporting in Europe

This paper investigates whether relative corporate sustainability as measured by the SAM sustainability rating and sustainability reporting in terms of Global Reporting Initiative (GRI) application levels are associated with a higher market valuation. We conduct a value relevance study for the 600 largest European companies with the Feltham and Ohlson (1995) valuation model as a reference point. Our results indicate that for the observation period 2001 to 2011, the association between corporate sustainability and market value is positive. The empirical evidence of a positive relationship between GRI reporting and market value is statistically significant in some but not all of the model specifications. We find no evidence of interaction between the value relevance of corporate sustainability and sustainability reporting, nor do we find any positive effect of external assurance on the capital market perception of GRI application levels. Our results support the notion that conducting business in accordance with ethical norms is also a shareholder value-increasing business strategy. However, it is not possible to verify the information given in sustainability reports through external assurance.

Análise do impacto da substituição da DOAR pela DFC: um estudo sob a perspectiva do value-relevance

Nos últimos 40 anos, diversos estudos têm se voltado para a discussão da relevância da informação contábil. São os denominados estudos de value relevance da informação contábil. Neles utilizam-se estudos, variáveis contábeis para tentar explicar o comportamento do preço das ações. O foco é verificar, por meio de análise de regressão, se certa informação contábil tem conteúdo informacional para o mercado de capitais. Nesse contexto insere-se este artigo, que tem por objetivo analisar o impacto da substituição da DOAR (Demonstração das Origens e Aplicações de Recursos) pela DFC (Demonstração dos Fluxos de Caixa), implementada pelas mudanças nas normas contábeis brasileiras vigentes para o exercício de 2008. Para tanto, analisa-se a questão do value relevance das origens de recursos das operações (OROPA) provenientes da DOAR e do fluxo de caixa operacional (FCOPA) proveniente da DFC, para os exercícios de 2005 a 2007, das empresas não financeiras de capital aberto listadas na base de dados Melhores e Maiores da FIPECAFI-EXAME. As evidências empíricas encontradas apontam que o Fluxo de Caixa Operacional (FCOPA) é mais relevante que as Origens de Recursos das Operações (OROPA) para o mercado de capitais, sugerindo que a substituição da DOAR pela DFC foi benéfica para os usuários da informação contábil no Brasil, pois acrescentou relevância às informações, embora estudos anteriores tenham apontado a DOAR como uma demonstração mais rica em informação, ou seja, uma demonstração que permite ao usuário extrair dela mais informação. Uma justificativa plausível para esse achado é o fato de a DFC ser uma demonstração mais fácil de ser compreendida e mais amigável, principalmente para os usuários menos familiarizados com a Contabilidade, o que faz com que seja mais utilizada.

The value relevance of non-financial performance indicators: new cues from the European fashion industry

Intangible assets and related performance measures assume increasing importance in valuation processes. Value relevance studies testify to their importance through an analysis of market stock prices. We aim to examine the value relevance of non-financial indicators in European fashion companies. The indicator selected is the "change in mono-brand stores". Applying the models proposed by current literature, we have refuted the value relevance hypothesis. However, refining both the "operationalization" of the concepts and the related result analysis procedure, the value relevance is confirmed. In this way, we contribute to increasing the generalizability of this research trend and to fuel the debate concerning the standardization process of this information. In particular, following in the footsteps of the Gartner/EBRC project, supported by AICPA (Gartner-EBRC, 2010), our results can help the national and international standard setters to pinpoint the indicators that really matter for the fashion industry and standardize their communication.

Theoretical Role of the Most Recent Prior Period’s Equity Price in Value Relevance Studies

This paper uses the Ohlson (1995) model and other related literature to theoretically demonstrate that the empirical specification of value relevance models with current or next period’s equity price as the dependent variable can be vastly improved when they utilize the most recent prior period’s equity price as an additional explanatory variable. The explanation further indicates that value relevance studies that use the Ohlson (1995) model should employ change in price or else returns, not the price level, as the dependent variable. These improvements to the empirical specification are shown to be important when past share price is highly correlated with important information that affects future earnings. This study reformulates the Ohlson (1995) value relevance model to demonstrate how it accommodates the most recent prior period equity price as an additional explanatory variable and also demonstrates how the earnings-based value relevance regression model equations can be used to improve the empirical specification for investigating the value relevance of an accounting variable.

The Effect of Market Inefficiency on the Value Relevance of Earnings

This study investigates the effect of market inefficiency on the value relevance of earnings. Many prior studies challenge the efficiency of the stock market, an assumption the value relevance studies build on. With evidence of market inefficiency, it becomes important to understand how the extent of market inefficiency affects the results presented in value-relevance studies. Using the speed of a stock’s price response to news as the measure of the degree of market inefficiency, we investigate the effect of market inefficiency on the relation between annual returns and contemporaneous annual earnings, as well as future earnings. We document that the informativeness of future earnings and current earnings is negatively related to the level of market inefficiency. These results suggest that when market efficiency improves, contemporaneous and future earnings of firms become more informative.

Accounting for Research and Development Costs and Value Relevance Study

Accounting for Research and Development Costs and Value Relevance Study

Coincident and forecast relevance of accounting numbers

Purpose – Value relevance studies, in particular international comparative studies, use market values sampled at different dates relative to the fiscal year-end. This paper aims to contribute a theoretical and empirical analysis of the relationship between value relevance and the month of market value sampling. Design/methodology/approach – The paper examines two components of value relevance, coincident relevance and forecast relevance, which the paper develops on the basis of the Ohlson model. The paper measures value relevance by estimating separate panel-data regressions for each of the 12 months around fiscal year-end. The sample consists of companies listed in two continental European countries, France and Germany, over the 1989-2008 period. Findings – In both country panels, the paper finds that overall value relevance is higher when market value is sampled before or close to fiscal year-end, but incremental value relevance varies between domestic and International Financial Reporting (IFRS) accounting standards. Regression results reveal significant variations in coefficients over the following months of market value in French panel and its IFRS sub-sample only. Research limitations/implications – The scope of the study is limited to the average value relevance parameters of companies listed on stock exchanges in France and Germany. Future research may be devoted to other countries and study additional determinants of value relevance. Practical implications – The study shows that the selection of the month of market value sampling can have significant impact on value relevance regression results. Therefore, sensitivity analysis needs to be included in research studies which rely on the value relevance approach. Originality/value – The paper contributes the first systematic analysis of the variation in value relevance parameters in response to the selection of the month in which market value is sampled.

Coincident and Forecast Relevance of Accounting Numbers

Value relevance studies, which examine the relationship between accounting numbers and equity valuation, use market values sampled a number of months after the publication of annual financial reports. Although it stems from the researchers' belief that accounting information needs to be made available before it can be discounted in market prices, this approach disregards a substantial body of literature that proves to the contrary. Our study provides empirical evidence that directly supports the interpretation of value relevance as the ability of accounting numbers to capture value-relevant information that has already been included in market valuation. In order to describe the temporal relationship between accounting-based equity valuation and market value of equity we introduce two new concepts: coincident and forecast relevance of accounting numbers. The first represents the relevance of accounting information for market values sampled during the reporting year, while the latter represents the relevance of accounting numbers for market values sampled after fiscal year-end. We measure coincident and forecast relevance by estimating Ohlson model parameters with country panel regressions for exchange-listed companies from France and Germany. The results confirm that coincident relevance is stronger than forecast relevance in both countries. The findings contribute to the studies on value relevance by suggesting improvements to current research methods.

Does an End of Period's Accounting Variable Assessed have Relevance for the Particular Period?

Ohlson (1995) indicates how a firm’s current earnings can be a proxy for its future earnings potential in the equity valuation model. It is notable that equity price – earnings relationship in value relevance studies explores the relevance of earnings to indicate a firm’s future earnings, not the relevance for a particular period’s earnings. This explanation provides three scenarios how empirical explanations are related to consider current earnings as a proxy for future earnings, not as a periodic measure as a whole, in empirical models. This proxy role of current earnings possibly implies that a particular period’s earnings, on a stand-alone-basis, explain not only the end of period’s price but also subsequent periods’ equity prices. Further, assessing relevance of a periodic accounting variable in the same (periodic) context is important in modelling, if the accounting practice for the accounting variable needs empirical clarification or justification in relation to equity price.