The Declining Value Relevance of Accounting Information and Non Information-Based Trading: An Empirical Analysis

21 Pages Posted: 8 Oct 2008

See all articles by Alex Dontoh

Alex Dontoh

New York University (NYU) - Department of Accounting

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Joshua Ronen

New York University (NYU) - Department of Accounting

Multiple version iconThere are 3 versions of this paper

Date Written: August 2000

Abstract

Recently, a growing body of literature has suggested that financial statements have lost their value relevance because of a shift from a traditional capital-intensive economy to a hightechnology, service-oriented economy. These conclusions are based on studies that find a temporal decline in the association between stock prices and accounting information (earnings and book values). This paper empirically tests a theoretical prediction arising from the NoisyRational Expectations Equilibrium model that suggests that the decline could be driven by noninformation- based (NIB) trading activity, because such trading reduces the ability of stock prices to reflect accounting information. Specifically, Dontoh et al. (2004) show that when NIB tradingincreases, the R-squares of a regression of stock price on accounting information declines. Our empirical tests confirm this prediction; i.e., the decline in the association between stock pricesand accounting information as measured by R-squares is driven by an increase in NIB trading.

Keywords: Noisy rational expectations equilibrium, Non-information-based trading, Value relevance

Suggested Citation

Dontoh, Alex and Radhakrishnan, Suresh and Ronen, Joshua, The Declining Value Relevance of Accounting Information and Non Information-Based Trading: An Empirical Analysis (August 2000). NYU Working Paper No. ALEX DONTOH-1. Available at SSRN: https://ssrn.com/abstract=1280669

Alex Dontoh (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
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Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
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972-883-6811 (Fax)

Joshua Ronen

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

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