Value Relevance Of Information Research Articles

Are Preference Reversals Due to Decision Contexts or Elicitation Procedures? A Theoretical Reconciliation

Preference reversals across decision contexts (e.g., acquisition versus forfeiture) and elicitation procedures (e.g., choice versus willingness-to-pay; WTP) provide foundational evidence that consumers’ preferences are constructed––not revealed––in the decision-making process. We examine the interplay of decision context and elicitation effects. We find that preference reversals are mostly driven by decision context effects on choice, not on preference elicitations requiring monetary valuation, like WTP. In three classic paradigms––intertemporal tradeoffs, acquisition versus forfeiture, and the attraction effect––decision-context effects more often induced preference reversals when preferences were elicited through choice than when preferences were elicited through Willingness-to-Pay or Willingness-to-Accept (WTP/WTA), even with real money at stake. Preference reversals between decision contexts were less prevalent in WTP/WTA than in choice because attribute compatibility effects made market relevant attributes, that is, value relevant information, more salient and weighted heavily in WTP/WTA than in choice. The results (eight experiments; N=3,544) change our understanding of preference reversals and challenge the use of choice as the gold standard for preference elicitation.

Do Donors Value Volunteer Commitment in Assessing Nonprofit Effectiveness?

We examine whether donors value volunteer commitment disclosures reported on the IRS Form 990. Donors and volunteers prefer to make respective gifts of money and time to nonprofits that are effective in furthering their missions. Based on the premise that volunteers, as insiders to an organization, are better positioned than donors to judge the impact of their contributions, we hypothesize that volunteer commitment provides value relevant information to donors. We find that donations are positively associated with the level of volunteer commitment and that other (noisy) effectiveness disclosures – namely the program ratio and corporate governance disclosures – are more value relevant when considered alongside volunteer commitment. These results suggest that donors view volunteer commitment as a signal of effectiveness and useful in interpreting other measures of effectiveness. Our evidence is more pronounced among sophisticated donors and charitable (relative to medical and educational-oriented), more volunteer intensive, and more complex nonprofits.

ESG Rating Events and Stock Market Reactions

This paper examines the effect of Environmental-, Social- and Governance- (ESG) rating events on returns and risks of stocks based on a large sample of US firms and their MSCI ESG ratings. Using event study methodology, we find that markets react with significant negative abnormal returns to downgrades in environmental and in social scores. ESG rating changes thus seem to provide new value-relevant information to market participants. Further, applying a difference-in-differences approach, we assess whether and how changes in ESG rating impact the risks associated with stocks by examining downside, systematic and total risk. Our findings suggest that rating changes already materialize shortly after the rating event. Upgrades in environmental scores significantly moderate downside risk, whereas upgrades in governance scores seem to mitigate systematic risk. Therefore, by improving the firm’s ESG profile, managers can mitigate value-relevant risks of their firms in short-term.

Are required SEC proxy disclosures about the board’s role in risk oversight substantive?

The U.S. Securities and Exchange Commission (SEC) requires companies it regulates to include disclosures about the board’s role in risk oversight in the annual proxy statement to shareholders. The SEC does not mandate specific content or actions that boards should perform as part of their risk oversight responsibilities, leaving the nature of activities and extent of those disclosures to the discretion of the reporting entity. This study examines whether these disclosures contain substantive information reflective of the effectiveness of the organization’s risk oversight. We find that organizations disclosing more specific information (but not simply more information) about board risk oversight practices are associated with firms independently assessed as having the strongest management and governance processes. These findings suggest that these firms use the discretion provided by the SEC’s disclosure rule to provide substantive and potentially value-relevant information for stakeholders about the entity’s risk management processes and board risk oversight activities.

Measuring Utility and Speculation in Blockchain Tokens

A large segment of cryptoassets consists of tokens—simple code running on programmable blockchains such as Ethereum—that serve as a payment or governance mechanism for an underlying digital platform, usually a peer-to-peer marketplace of various services. An ongoing debate about the viability of the token market is centered on whether tokens are used purely for speculation, or have actual utility on their underlying platforms. The objective of this study is to create and validate a set of granular measures of token utility and speculation. Using disaggregated data on 270 million transactions in 891 tokens hosted on the Ethereum blockchain, we construct three intuitive measures of token utility and speculation: utility turnover (UT), speculative turnover (ST), and DeFi ratio (DF). These measures first reveal a striking decline—of about 90%—in average token utility usage since 2017. This decline coincides with an equally pronounced increase in token speculation, with exchange-based speculation peaking at mid-2020. We show that the emergence of DeFi applications, which offer increasingly levered and complex speculative tools, are crowding out both utility and speculation usages and further extending the increase in token speculation. We provide additional economic validation of our measures by relating them to future market outcomes and show that token utility negatively predicts return volatility in the cross section, while both speculative measures positively predict volatility. Additionally, DeFi activities positively predict future market-adjusted returns. These results suggest that our measures embed value-relevant information about the economic activities in the token-linked platforms, and about the intensity of speculative noise trading in these tokens, thus making them useful outcome or explanatory variables in future empirical analyses of blockchain tokens and platforms.

The Information Content of Corporate Websites

In 2008, the SEC published guidance allowing firms to use corporate websites as an alternative disclosure channel to EDGAR. While the information content and market reaction to traditional disclosure channels such as EDGAR filings and press releases are well-documented, evidence on corporate websites as a disclosure channel is scarce. In this paper, we take the first step toward shedding light on corporate websites as an important source of information to investors. Employing standard event study methods, we develop a novel measure of corporate website content and find that increases in website content provide significant value-relevant information to investors incremental to that contained in traditional disclosure channels. In addition, we find a negative relation between website content and information asymmetry, and that this negative relation is most pronounced after the SEC’s 2008 guidance. Comparing the content of websites to EDGAR, we find that websites contain more content related to business operations and that the market reaction to such information is heighten. Collectively, our findings indicate that corporate websites are an economically significant source of new information that supplements traditional disclosure channels considered in prior literature.

Employee-Friendly Corporate Culture and Firm Performance: Evidence from a Machine Learning Approach

This study investigates which values of an employee-friendly (EF) corporate culture are the most important predictors of firm value and operating performance using a novel social media dataset of approximately 250,000 crowdsourced employee reviews of 18 different characteristics of a firm’s corporate culture. The extreme gradient-boosting model with SHAP (Shapley additive explanations) and SAGE (Shapley additive global importance) values is used to examine the predictive value and relative importance of employee-friendly cultural values and the potential nonlinearities of these relationships. We find that several employee-friendly corporate culture features contain value-relevant information for predicting firms’ value (Tobin’s Q) and operating performance (ROA). Our findings (SAGE values) reveal three features indicating that predictive importance is clearly superior to other EF culture variables in our machine learning model: employee reviews about the overall company culture, pride in the company, and job security. Based on the SHAP values, these effects are positive, significant, and closely linear. The effects are negative for low values of an EF corporate culture and strongly positive for high values. Specifically, we find that satisfaction with the overall company culture and organizational pride are the most important characteristics for predicting Tobin’s Q, whereas job security and the overall company culture are the most crucial predictors of ROA. Other significant predictors of Tobin’s Q are the attitude towards older colleagues, work–life balance, office/work environment, inclusive/diverse, and gender equality, while environmental friendliness, gender equality, workplace safety, and inclusive/diverse are important predictors of ROA.

AUDIT COMMITTEE AND ACCOUNTING INFORMATION VALUE RELEVANCE

This paper describes the results of empirical research investigated the effect of audit committee characteristics (AC) on the accounting information value relevance (VR) for Indonesian companies in 2014 - 2018. VR is measured using the Ohlson Model, while AC is measured using its members and its independence members. By using data of 590 firm-years, this study found that the size of the committee audit and the AC independence positively affects the value relevance of EPS. Yet, the AC size affects negatively the BVS value relevance whereas the AC independence does not affect BVS value relevance. These results enrich the literature of value relevance, especially in connection to the AC characteristics.

The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39

The first-time adoption of IAS/IFRS accompanied by the issuance of new international accounting standards has provided mixed results regarding their ability to improve accounting quality. A possible reason is that not only the quality of the standard-setting process, but also other factors might affect accounting quality and one of its dimensions, namely, value relevance. By analysing data from a sample of 316 financial entities listed in 43 countries from all over the world and adopting IFRS 9 in place of IAS 39 as of 1st January 2018, this paper tests whether the quality of firm-level corporate governance and country-level investor protection environments affects the value relevance of equity values calculated according to the requirements of IFRS 9 and IAS 39. The results suggest that, despite both accounting standards providing investors with value relevant information, in the presence of high-quality corporate governance or a high-quality investor protection environment, IFRS 9 is more value relevant than IAS 39, whereas the opposite is true in the presence of low-quality corporate governance or a low-quality investor protection environment. The research results provide the first empirical evidence of the value relevance of the new accounting standard on financial instruments and contribute to the debate on the existence of other factors that, together with the quality of the IASB standards, affect the quality of financial reporting.

Financial materiality in the informativeness of sustainability reporting

AbstractThis study examines whether financial materiality in environmental, social, and governance (ESG) disclosure benefits the stock market by increasing the amount of accessible and relevant firm‐specific information. Based on the value relevance of information and the principle of financial materiality, we demonstrate that disclosing material ESG information increases stock price informativeness. We conduct an automated content analysis of 150,000 electronic documents filed by firms listed on the S&P/TSX Composite Index from 1999 to the end of 2014. Our findings show that ESG disclosure is indeed value relevant for investors and that financial materiality in ESG disclosure leads to more informative stock prices. In addition, the effect of ESG disclosure on stock price informativeness differs across the ESG components, being more sensitive to the social component. This study contributes to the literature on sustainability reporting, and in particular to the ongoing discussion about whether the financial materiality of ESG issues matters. This study also deepens the understanding of agency theory predictions about the economic effects of ESG disclosure.

Managerial multi-tasking, Team diversity, and mutual fund performance

This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.

Does Integrated Reporting Enhance the Value Relevance of Information? Evidence from Sri Lanka

This paper examines the relationship between the level of integrated reporting (IR) based on the extent of adoption of the International Integrated Reporting Framework (IIRF) and the firm value (a proxy for value relevance of IR) in Sri Lanka, where the adoption of IR is a voluntary exercise. Using a comprehensive disclosure checklist, 117 integrated reports were content-analyzed, and then two regression models assessed the value relevance of IR disclosure. The study notes an increasing trend toward the adoption of IIRF in the preparation of integrated reports overall, as well as of each content element of IIRF. However, this rising trend has not significantly impacted the firm value by itself. Hence, this study’s findings do not support the enlightened stakeholder’s view on the subject of IR in Sri Lanka. Instead, it shows a significant positive relationship with the firm value when combined with the information on earnings (earnings per share), indicating that IIRF-compliant IR improves the value relevance of accounting information. This study offers insights for policymakers, professional accounting bodies, and practitioners on how investors make use of the information disclosed in integrated reports in their decision-making.

Signal or Noise in Social Media Discussions: The Role of Network Cohesion in Predicting the Bitcoin Market

ABSTRACT Prior studies have shown that social media discussions can be helpful in predicting price movements in financial markets. With the increasingly large amount of social media data, how to effectively distinguish value-relevant information from noise remains an important question. We study this question by investigating the role of network cohesion in the relationship between social media sentiment and price changes in the Bitcoin market. As network cohesion is associated with information correlation within the discussion network, we hypothesize that less cohesive social media discussion networks are better at predicting the next-day returns than more cohesive networks. Both regression analyses and trading simulations based on data collected from Bitcointalk.org confirm our hypothesis. Our findings enrich the literature on the role of social media in financial markets and provide actionable insights for investors to trade based on social media signals.

IAS 7 and Value Relevance: The Direct Method Versus the Indirect Method

We identify and predict circumstances where the direct method statement of cash flows is expected to provide more value relevant information to financial statement users. We predict the direct method is more informative when earnings are of lower quality (earnings are less permanent, or companies report losses), companies are in a more stable state (proxied by small absolute changes in accruals/operating cash flow) and when cash flows/accruals are measured with more error using the indirect method. Direct method disclosure is also predicted to be more useful for small companies, where investors have less alternative sources of information beyond financial statements. We analyze Australian companies because they are required to report the direct and indirect method and we further decompose the sample into industrial, mining and company size to take into account the unique features of the Australian market. Our results are consistent with our predictions. This suggests the indirect method is as informative as the direct method on average, but the direct method incrementally informs stock returns in specific circumstances. We also identify operational factors that significantly increase estimation error when estimating direct method line items for cash receipts and cash payment.

On the Nexus Between CSR Practices, ESG Performance, and Asymmetric information

The purpose of this paper is to test the relationship of CSR practice­–asymmetry information and ESG performance–asymmetry information. We conjecture that there might be a particular role where the disclosure of non-financial information is deemed useful in truncating the level of asymmetry information. Using the data from two different countries, Indonesia (Asia) and Portugal (Europe), we extracted 37 companies with time period of observation ranges from 2012 to 2016. To manifest the empirical test, we use CSR report (CSR_Rep), CSR committee (CSR_com), CSR assurance (CSR_ass) and GRI adoption as the proxies of CSR practice, while the proxies of ESG performance are represented by Environmental (ENVscr), Social (SOCscr), and Governance (GOVscr) pillar scores as obtained from Thomson Reuters ASSET4 database. Bid-ask spread is used as the surrogate indicator of asymmetry information. The empirical test reveals that only variable GRI and SOCscr show negative and significant association with bid-ask spread. Whilst, the remaining variables of CSR practice (CSR_rep, CSR_com, CSR_ass), and ESG performance (ENVscr and GOVscr) are negatively associated with asymmetry information (Spread) but statistically insignificant. Our results suggest that CSR practice and ESG performance are weakly associated with asymmetry information, in which most of CSR practices and ESG performance need a time lag to allow them to be value relevant information in mitigating the level of asymmetry information.

The Joint Influence of Information Push and Value Relevance on Investor Judgments and Market Efficiency

We use experimental markets to examine how pushing investment information and the value relevance of that information interact to influence investors’ value estimate accuracy and market price efficiency. Developments in technology allow information to be pushed to investors anytime and anywhere. However, in addition to value-relevant information, pushed information often includes information that is irrelevant for assessing firm value. Drawing on psychology theory, we find that pushing information has divergent effects depending on the value relevance of the information. Pushing only value-relevant information increases investors’ processing of the information and leads to more accurate value estimates and market prices than when not pushed. In contrast, pushing a mix of value-relevant and value-irrelevant information reduces investors’ processing of value-relevant information, leading to less accurate value estimates and market prices than when not pushed or when only value-relevant information is pushed. A supplemental experiment provides evidence that this differential processing is primarily attributable to differences in acquisition rather than integration of the value-relevant information. Collectively, our results reveal a dark side to push technologies, particularly with the growing presence of value-irrelevant information.

Value relevance of digitalization: The moderating role of corporate sustainability. An empirical study of Italian listed companies

The purpose of this paper is to assess whether a relation exists between stock market valuation and the extent to which Italian listed companies disclose information on their digitalization initiatives. The authors posit that the disclosure of digitalization-related information is a form of intellectual capital disclosure, which provides potentially value-relevant information to investors. Additionally, it is assumed that the reputation for corporate sustainability affects the relation between digitalization disclosure and stock market valuation.To test the aforementioned hypotheses, the authors first quantified the extent of digitalization disclosure by content-analysing the annual reports of 75 Italian listed companies for the years 2011–2017, and then they examined the value relevance of digitalization-related information accounting for the role of corporate sustainability.Empirical results suggest 1) that stock market participants incorporate digitalization-related information into their business valuation process, and 2) that firms with better reputation for corporate sustainability achieve higher valuations from disclosing their digitalization efforts.The potential contribution of this study is manifold: first, it extends prior research on the value relevance of IC disclosure by broadening its scope to include digitalization-related disclosure and evidencing the (moderating) role of corporate sustainability in firm valuation; second, it provides some empirical substance to the discussion on how to measure the value a company extracts from digitalization efforts; and third, it may support the case for increased non-financial disclosure as called for by accounting regulators and standard setters.

IPO UNDERPRICING AND INFORMATION QUALITY OF PROSPECTUSES

Effective information disclosure is the cornerstone of sustainable operation of the capital market. In the IPO market, whether public information in the prospectus can be fully captured by investors largely depends on the quality of valuation-relevant information. Based on Chinese prospectuses, we create five unique indicators to measure the information quality and examine the relationship between information quality and IPO underpricing. We find that high quality of information disclosure results in less underpricing because they relieve serious information asymmetry between issuing companies and investors. We provide a new method to supervise and improve the quality of non-financial information disclosure.

The Role of a Latent Value-Relevant Measure in Tracking and Predicting Stock Returns: A FAVAR Approach

This paper attempts to estimate and study the role of 'other information', as posited in the residual income valuation model of Ohlson (1995), for tracking and predicting future returns of the S&P 500. 'Other information' is an unobserved variable and defined as a summary of value-relevant information about events and their effect on future profitability, which is captured in a company's current stock price and returns, but not yet reflected in a company's current financial statements. This suggests a potential to predict subsequent returns. Previous literature has found that traditional valuation metrics (e.g. B/P, E/P, and D/P ratios) have poor predictive power. In this study, we apply a factor augmented vector autoregression (FAVAR) to estimate this value-relevant latent variable and assess its predictive performance. The FAVAR is a suitable model because it enables us to analyze and quantify the linkages of stock market value, profitability, and unobserved factors that are broadly captured by big data. We use a two-step principal components estimation approach to extract the unobserved factors of 78 informational variables from financial market, accounting, investor and consumer sentiment, and macroeconomic data. Our analysis shows that, in comparison to competing measures, the estimated latent value-relevant variable can track contemporaneous stock returns and has statistically reliable power to predict both future real stock returns and excess returns over a Treasury Bill rate, both in- and out-of-sample.

The value relevance of corporate financial and nonfinancial information provided by the integrated report: A systematic review

AbstractThe integrated report (IR) is a new reporting tool connecting financial and nonfinancial information, in one report. The aim of IR is to present the firm's value creation over time. In recent years, IR has received both increasing academic and professional interest. Recent researches have focused on the potentialities (and criticalities) of IR and on its determinants, while there is a dearth of studies examining the value relevance of the information disclosed through IR for investors. Furthermore, in the literature, there are two competing views on IR usefulness for investors, one positing IR as beneficial, the other, detrimental to investors. Our study intends to contribute to the existing literature by systematically reviewing the empirical studies conducted until now in a thorough and unbiased manner, allowing more general conclusions to be drawn about the phenomenon than is possible from individual studies and to give some insights for further research activities.