The Declining Value Relevance of Accounting Information and Non-Information-Based Trading: An Empirical Analysis

21 Pages Posted: 9 Aug 2000

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: May, 2004

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 high-technology, 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 trading increases, 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

JEL Classification: D82, G14, M41

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 (May, 2004). Available at SSRN: https://ssrn.com/abstract=230826 or http://dx.doi.org/10.2139/ssrn.230826

Alex Dontoh (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
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Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
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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