The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting
Robert W. Holthausen
University of Pennsylvania - Accounting Department
Ross L. Watts
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Simon School of Business Working Paper No. FR 00-05; JAE Rochester Conference April 2000
We evaluate the literature that, for standard-setting purposes, assesses the usefulness of accounting numbers on their stock market value association. For several reasons we conclude the literature provides little insight for standard setting. First, the association criterion has no theory of accounting or standard setting supporting it. Standard setters' descriptions of their objectives and accounting practice are both inconsistent with the criterion. Important forces shaping accounting standards and practice are ignored. Second, many tests in the literature rely on valuation models that omit important factors and many studies do not provide links between valuation model inputs and accounting numbers. Finally, there are a variety of significant econometric issues in the studies.
Number of Pages in PDF File: 80
JEL Classification: M41, M44, M49, G12
Date posted: October 20, 2000
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