Changes in the Value-Relevance of Earnings and Book Values over the Past Forty Years
Daniel W. Collins
University of Iowa - Department of Accounting
Edward L. Maydew
University of North Carolina at Chapel Hill
Ira S. Weiss
University of Chicago - Graduate School of Business; Columbia Business School - Department of Accounting
This paper investigates systematic changes in the value-relevance of earnings and book values over time. We report three primary findings. First, contrary to claims in the professional literature, the combined value-relevance of earnings and book values has not declined over the past forty years and, in fact, appears to have increased slightly. Second, while the incremental value-relevance of "bottom line" earnings has declined, it has been replaced by increasing value-relevance of book values. Finally, much of the shift in value-relevance from earnings to book values can be explained by the increasing frequency and magnitude of one-time items, the increasing frequency of negative earnings, and changes in average firm size across time.
JEL Classification: M41
Date posted: November 4, 1996
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