Value Relevance of Discretionary Accruals in the Asian Financial Crisis of 1997-1998

Abstract

This study investigates whether and how the information values of reported earnings and their components changed around the Asian financial crisis of 1997-1998. Regression analyses on a sample of 10,406 firm-years from nine Asian countries from 1995 to 2000 reveal the following. First, the crisis led to a significant decline in the value relevance of discretionary accruals but had no significant impact on the value relevance of nondiscretionary earnings components such as operating cash flows and nondiscretionary accruals. Second, the decrease in the value relevance of discretionary accruals during the crisis was more severe for firms in countries with weak institutions than for those in countries with strong institutions. Third, the value relevance of discretionary accruals declined to a greater extent for firms with high information asymmetries than for firms with low information asymmetries. Our results are robust to a variety of sensitivity checks.

Keywords: Asian financial crisis, value relevance, discretionary accruals, nondiscretionary accruals, operating cash flows

JEL Classification: F30, G15, M41