Do Financial Statement Users Judge Relevance Based on Properties of Reliability?

40 Pages Posted: 12 Jul 2010 Last revised: 12 Jun 2012

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Lisa Koonce

University of Texas

Jane M. Thayer

Georgia Institute of Technology

Date Written: October 6, 2011

Abstract

Relevance and reliability (now referred to as “representational faithfulness”) are qualities of financial information that both the Financial Accounting Standards Board and the International Accounting Standards Board use in setting standards for financial reporting. Despite their importance, very little research has addressed how financial statement users apply these constructs. Via experiments set within the fair value context, we show that users do not view them as independent constructs. Instead, variations in properties that are associated with the reliability of a measurement influence users’ assessments of the relevance of fair value. The relationship between assessed relevance and assessed reliability is unidirectional, in that factors underlying reliability influence judgments of relevance, but factors underlying relevance do not influence judgments of reliability. Our findings are important because inappropriate assessments of relevance can influence firm valuation. The results are particularly meaningful in the context of fair value because such measurements can vary widely in reliability.

Keywords: Relevance, Reliability, Fair Value, Valuation

JEL Classification: M41

Suggested Citation

Kadous, Kathryn and Koonce, Lisa L. and Thayer, Jane M., Do Financial Statement Users Judge Relevance Based on Properties of Reliability? (October 6, 2011). Emory Public Law Research Paper No. 10-114, Emory Law and Economics Research Paper No. 10-73, Available at SSRN: https://ssrn.com/abstract=1639132 or http://dx.doi.org/10.2139/ssrn.1639132

Kathryn Kadous

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4967 (Phone)

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Jane M. Thayer

Georgia Institute of Technology

Atlanta, GA 30332
United States

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