Evolution in Value Relevance of Accounting Information
64 Pages Posted: 14 Mar 2017 Last revised: 29 Aug 2019
Date Written: August 22, 2019
We address how value relevance of accounting information evolved as the new economy developed. Prior research concludes accounting information—primarily earnings—has lost relevance. We consider more accounting amounts and find no decline in combined value relevance from 1962 to 2014. We assess evolution in each amount’s value relevance and find increases, most notably for amounts related to intangible assets, growth opportunities, and alternative performance measures, which are important in the new economy. The number of relevant amounts also increases. We also consider separately new economy, non-new economy profit, and non-new economy loss firms. The relevance trends are more pronounced for, but extend beyond, new economy firms. We base inferences on a non-parametric approach that automatically incorporates nonlinearities and interactions, thereby unconstraining the valuation relation. Taken together, our findings reveal a more nuanced, but not declining, relation between share price and accounting information that reflects the new economy.
Keywords: Capital Markets, Classification and Regression Trees, Equity Valuation, Financial Reporting, Value Relevance
JEL Classification: C14, G10, G18, M40, M41
Suggested Citation: Suggested Citation