Financial Reporting and Firm Valuation: Relevance Lost or Relevance Regained?

44 Pages Posted: 15 Jan 2013 Last revised: 21 Apr 2013

Luzi Hail

University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2013

Abstract

In this study I examine whether balance sheet and income statement numbers have lost or regained their relevance over the last 30 years. Institutional and macroeconomic factors like the global trend towards strengthening regulation and harmonizing financial reporting, the extended use of fair values over historical cost, and the recurring occurrence of accounting scandals, market bubbles, and financial crises make it likely that the role of financial reporting for firm valuation has changed. Following prior research, I estimate four models for the concurrent relation between market value and accounting numbers, and then examine the pattern in explanatory power over time. I find that the loss in relevance of the income statement continues in recent years and is present in a large international sample, in particular in countries with strong institutions. While the overall relevance of the balance sheet remains stable, I find a downward trend during the first sample half, which reverses in the second half, especially in common law countries with strong investor protection, strict disclosure requirements, and integrated markets. Even though several caveats apply, the results suggest that changes in the economy, the institutional environment, and in how firms operate affect the relative importance of accounting information for the use in firm valuation by outside stakeholders.

Keywords: international accounting, valuation, value relevance, fundamental analysis, regulation, market efficiency, IFRS, fair values

JEL Classification: G14, G15, G30, M41, M48

Suggested Citation

Hail, Luzi, Financial Reporting and Firm Valuation: Relevance Lost or Relevance Regained? (April 19, 2013). Available at SSRN: https://ssrn.com/abstract=2200428 or http://dx.doi.org/10.2139/ssrn.2200428

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

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