Price Divergence from Fundamental Value and the Value Relevance of Accounting Information

Posted: 21 Jul 2009 Last revised: 14 Apr 2010

See all articles by Simon Fung

Simon Fung

Deakin University

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Xindong Kevin Zhu

City University of Hong Kong (CityUHK)

Date Written: April 13, 2010

Abstract

By employing two alternative measures of fundamental value, we re-examine the value relevance of accounting information over time. Consistent with some recent studies (e.g. Dontoh et al. 2007), we do not find evidence on the temporal decline in R-squares of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price: (1) increases over time and (2) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time, consistent with Dontoh et al. (2004). Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.

Keywords: value relevance, market efficiency, R-squares, fundamental values

JEL Classification: G12, G14, M41

Suggested Citation

Fung, Simon and Su, Lixin (Nancy) and Zhu, Xindong Kevin, Price Divergence from Fundamental Value and the Value Relevance of Accounting Information (April 13, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1436785

Simon Fung (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria
Australia

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Xindong Kevin Zhu

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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