The Informativeness of Financial Accounting Data for Emerging Growth Firms: An Application of the Feltham-Ohlson Model
Posted: 27 Apr 1998
Date Written: Undated
This study investigates the informativeness of financial accounting variables for emerging growth firms using a model based on the theoretical work of Feltham and Ohlson (1995), and empirically adapted by Ou and Penman (1993) and Bernard (1995). The model tests the association between a measure of future performance (future return on equity) and earnings, cash flow variables, and other financial accounting variables. The robustness of the results are further tested through sensitivity analysis by excluding outliers and utilizing industry classification and the age of the firm as delineators.The results, when combined with the results of Amir and Lev (1995) and Black (1995), increase our knowledge of the usefulness of financial accounting for firms in this early life-cycle stage. This prior research provided evidence that financial accounting data is of limited informativeness for early stage growth firms in the telecommunications industry (Amir and Lev) and start-up firms (Black). The empirical results support the efficiency contracting theory and provide evidence that reported financial accounting data are informative about future performance of emerging growth firms. In addition, the results are stronger when outliers are excluded, and when industry and age associations are considered.
JEL Classification: G12, M41
Suggested Citation: Suggested Citation