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 Noisy Rational Expectations Equilibrium model that suggests that the decline could be driven by non information 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 prices and 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. JOSHUA RONEN-01. Available at SSRN: https://ssrn.com/abstract=1280744

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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