The Value Relevance of Brazilian Accounting Numbers: An Empirical Investigation

Abstract

I present evidence of the value relevance of Brazilian accounting numbers under the Ohlson framework. My results suggest that book values are superior to earnings in terms of value relevance. I also show that accounting income does not incorporate economic income in a conservative way (asymmetrically). These results are consistent with the hypothesis that under the very concentrated ownership capital market system of Brazil accounting earnings are less useful as information asymmetry reducers while book values remain relevant due to legal implications of Brazilian corporate law. This result also supports the hypothesis that ownership concentration is the most relevant factor influencing earnings quality. Trading does not seem to play a relevant role in this analysis of accounting quality. I also show that accounting numbers are more relevant for companies of the so-called New Economy than for companies of the Old Economy. These results are contrary to what is normally supposed in the literature, which assumes that New Economy companies have more intangible assets that are not measured by traditional GAAP measures causing accounting numbers to lose relevance. The reasons behind these results demand further investigation. One possible explanation is that Brazilian accounting rules allow for a better representation of intangibles than US-GAAP. This is reasonable given the current accounting system in Brazil. Another alternative explanation is that corporate governance arrangements play a more important role than the accounting standards in the quality of accounting information.

Keywords: emerging markets, information asymmetry, value relevance, asymmetric recognition, new economy companies, intangible assets

JEL Classification: C21, D82, G12, G39, M41, M44