The Relevance of Value

Abstract

We propose a theory of value relevance based on a theory of information, with foundations in the efficient markets hypothesis. Like the EMH, we consider a theory of heterogeneous information, and like the EMH, testing for value relevance becomes a joint test of market efficiency, the process of price determination and value relevance. In assuming heterogeneity of information, we permit a classification of value relevance studies into weak-form, semi-strong and strong-form value relevance, similar to the classification used by Fama (1970) in defining the EMH.

As a consequence, we introduce an Efficient Accounting Hypothesis, and classify existing value relevance studies according to this hypothesis. The theory which we propose implies a recursive procedure for estimation, and we discuss the econometric implications.

Keywords: Value relevance, Market efficiency, Efficient accounting hypothesis

JEL Classification: G14, M41