Bridging the Gap between Value Relevance and Information Content

42 Pages Posted: 10 Jan 2001

See all articles by Kin Lo

Kin Lo

University of British Columbia (UBC) - Sauder School of Business

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Date Written: December 2000

Abstract

Three main approaches for examining the effect of accounting information in financial markets have emerged in the last three decades. We formally define information content, valuation relevance, and value relevance. Respectively, these approaches are based on Beaver (1968), Ball and Brown (1968), and tests of association between market values and accounting numbers. We systematically compare and contrast these paradigms to highlight their relative strengths and weaknesses, and to identify possible reasons why one method provides different results from another.

Implementing these research methods using data from the last three decades, we show that information content has remained constant while valuation relevance and value relevance have both declined. We find that our conclusions are robust with respect to return volatility, non-linearities of the valuation model used, earnings composition, and the earnings expectation model used. We conclude that the unrecognized disclosures released concurrently with earning sare likely to have contributed to this divergence.

Keywords: Valuation, capital markets, relevance of accounting information, information content

JEL Classification: C90, G10, G14, M41

Suggested Citation

Lo, Kin and Lys, Thomas Z., Bridging the Gap between Value Relevance and Information Content (December 2000). Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=253369 or http://dx.doi.org/10.2139/ssrn.253369

Kin Lo (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8430 (Phone)
604-822-9470 (Fax)

HOME PAGE: http://www.sauder.ubc.ca/Faculty/People/Faculty_Members/Lo_Kin

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
4,014
Abstract Views
10,847
rank
2,403
PlumX Metrics