Do Financial Statement Users Judge Relevance Based on Properties of Reliability?
Emory University - Goizueta Business School
University of Texas
Jane M. Thayer
University of Georgia - J.M. Tull School of Accounting
October 6, 2011
Emory Public Law Research Paper No. 10-114
Emory Law and Economics Research Paper No. 10-73
Relevance and reliability (now referred to as “representational faithfulness”) are qualities of financial information that both the Financial Accounting Standards Board and the International Accounting Standards Board use in setting standards for financial reporting. Despite their importance, very little research has addressed how financial statement users apply these constructs. Via experiments set within the fair value context, we show that users do not view them as independent constructs. Instead, variations in properties that are associated with the reliability of a measurement influence users’ assessments of the relevance of fair value. The relationship between assessed relevance and assessed reliability is unidirectional, in that factors underlying reliability influence judgments of relevance, but factors underlying relevance do not influence judgments of reliability. Our findings are important because inappropriate assessments of relevance can influence firm valuation. The results are particularly meaningful in the context of fair value because such measurements can vary widely in reliability.
Number of Pages in PDF File: 40
Keywords: Relevance, Reliability, Fair Value, Valuation
JEL Classification: M41working papers series
Date posted: July 12, 2010 ; Last revised: June 12, 2012
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