The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View

41 Pages Posted: 10 Nov 2000

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

William H. Beaver

Stanford University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 2001

Abstract

This paper offers a view of the relevance of value relevance research for financial accounting standard setting that contrasts with the view offered in Holthausen and Watts (2001) (hereafter HW). A key conclusion of HW is that value relevance research offers little or no insight for standard setting. As active participants in value relevance research, our purpose is to clarify the relevance of the value relevance literature to financial accounting standard setting. Because we are discussants of HW, we only address issues raised in that paper. In particular, HW is limited in scope to a discussion of the relevance of the value relevance literature for financial accounting standard setting; it does not comprehensively review the value relevance literature. Accordingly, our discussion is similarly limited. A key conclusion of our paper is that the value relevance literature provides fruitful insights for standard setting.

This paper also clarifies several misconceptions articulated in HW regarding value relevance research. In particular, in contrast with HW, we conclude: (1) value relevance research provides insights into questions of interest to standard setters and other non-academic constituents. (2) A primary focus of the FASB and other standard setters is equity investment. The possible contracting and other uses of financial statements in no way diminish the importance of value relevance research. (3) Empirical implementations of extant valuation models can be used to address questions of value relevance despite their simplifying assumptions. (4) Value relevance research can accommodate conservatism, and can be used to study its implications for the relation between accounting amounts and equity values. (5) Value relevance studies are designed to assess whether particular accounting amounts reflect information that is used by investors in valuing firms' equity, not to estimate firm value. (6) Value relevance research employs well-established techniques for mitigating the effects of various econometric issues that arise in value relevance studies.

JEL Classification: M41, M44, G12

Suggested Citation

Barth, Mary E. and Beaver, William H. and Landsman, Wayne R., The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View (January 2001). Available at SSRN: https://ssrn.com/abstract=246861 or http://dx.doi.org/10.2139/ssrn.246861

Mary E. Barth

Stanford University - Graduate School of Business ( email )

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William H. Beaver (Contact Author)

Stanford University ( email )

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Stanford, CA 94305-5015
United States
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Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

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Chapel Hill, NC 27599-3490
United States
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919-962-4727 (Fax)

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