Intrinsic Value Literature

{\rtf\ansi\deff0\ansicpg1252
{\fonttbl
{\f0\froman times new roman;}{\f1\ftech symbol;}}
{\colortbl\red0\green0\blue0;\red255\green255\blue255;\red0\green0\blue127;\red34\g
reen31\blue31;}
{\info{\author Test}}
\jexpand\viewkind1\viewscale100
{\shp{\*\shpinst\shpleft10013\shptop1133\shpright11533\shpbottom1413\shpfhdr0\shpwr
3\shpwrk0\shpfblwtxt1\shplid2028\shpz0\shpbxpage\shpbypage
{\sp{\sn shapeType}{\sv 0}}
{\sp{\sn fFlipH}{\sv 0}}
{\sp{\sn fFlipV}{\sv 0}}
{\sp{\sn rotation}{\sv 0}}
{\sp{\sn geoRight}{\sv 1520}}
{\sp{\sn geoBottom}{\sv 280}}
{\sp{\sn shapePath}{\sv 4}}
{\sp{\sn pVerticies}{\sv 8;5;(0,0);(0,280);(1520,280);(1520,0);(0,0);}}
{\sp{\sn pSegmentInfo}{\sv
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
{\sp{\sn fFillOK}{\sv 1}}
{\sp{\sn fFilled}{\sv 1}}
{\sp{\sn fillColor}{\sv 8355711}}
{\sp{\sn fLine}{\sv 0}}{\sp{\sn lineColor}{\sv 0}}
{\sp{\sn lineType}{\sv 0}}
{\sp{\sn fArrowheadsOK}{\sv 0}}
{\sp{\sn fBehindDocument}{\sv 1}}
{\sp{\sn fLayoutInCell}{\sv 1}}}}
{\shp{\*\shpinst\shpleft1253\shptop1440\shpright11560\shpbottom1440\shpfhdr0\shpwr3
\shpwrk0\shpfblwtxt1\shplid2029\shpz1\shpbxpage\shpbypage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
{\sp{\sn fLayoutInCell}{\sv
1}}}}\paperw12240\paperh15840\margl666\margr133\margt666\margb200
\cols2\colno1\colw9346\colsr-0\colno2\colw2093\pard\li4293\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100\b \i {The Open Business Journal,}\b0 \i0
\fs16\cf0\f0\charscalex100\b { 2009, }\b0 \fs16\cf0\f0\charscalex100\b \i
{2, }\b0 \i0 \fs16\cf0\f0\charscalex100\b {7-27}\b0 \par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li613\ri0\sl-520\slmult0 \fs32\cf0\f0\charscalex100\b {A Review
of the Value Relevance Literature}\b0 \par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li613\ri0\sl-453\slmult0 \fs24\cf0\f0\charscalex100 {Leif Atle
Beisland}{\super \fs16\up4\cf0\f0\charscalex100 {*}}\par\pard\li613\ri0\sl-
\fs18\cf0\par\pard\li613\ri0\sl-280\slmult0 \fs18\cf0\f0\charscalex100\i {Faculty
of Economics and Social Sciences, University of Agder, 4604 Kristiansand,
Norway }\i0 \par\column\pard\li1386\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b
{7}\b0 \par\pard\li0\ri0\sl-480\slmult0 \fs24\cf1\f0\charscalex100\b {Open
Access}\b0 \par\pard\sect\sectd\sbknone\pard\li1466\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li1466\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100\b
{Abstract:}\b0 { }\fs18\cf0\f0\charscalex100 {Value relevance research empirically
investigates the usefulness of accounting information to stock
investors. }\par\pard\li1466\ri0\sl-226\slmult0 \fs16\cf0\f0\charscalex100
{Accounting information is denoted as value relevant if there is a statistical
association between the accounting numbers }\par\pard\li1466\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {and market values of equity. This review provides a
comprehensive study of the value relevance literature. The review
fo-}\par\pard\li1466\ri0\sl-226\slmult0 \fs16\cf0\f0\charscalex100 {cuses mainly on
high-quality value relevance research from the last two decades, but it also covers
seminal studies from }\par\pard\li1466\ri0\sl-226\slmult0
\fs16\cf0\f0\charscalex100 {the late 1960s. The primary focus is on research on
U.S. financial data, but some international evidence is also
presented. }\par\pard\li1466\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {The
articles are generally selected from top accounting journals. The review offers an
introduction to the methodology}\par\pard\li1466\ri0\sl-213\slmult0
\fs16\cf0\f0\charscalex100 {employed within this research tradition and presents
the main results from studies regarding the value relevance of the
two }\par\pard\li1466\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {summary
measures used in financial reports, namely, earnings and book equity. Furthermore,
the review describes studies }\par\pard\li1466\ri0\sl-213\slmult0
\fs16\cf0\f0\charscalex100 {on the development in value relevance over time and
shows how value relevance from different accounting methods
can }\par\pard\li1466\ri0\sl-226\slmult0 \fs16\cf0\f0\charscalex100 {be compared.
Overall, the review provides in-depth information on the value relevance literature
to readers who wish to }\par\pard\li1466\ri0\sl-226\slmult0
\fs18\cf0\f0\charscalex100 {familiarise themselves with this line of empirical
accounting research.}\par\pard\li613\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100\b {Keywords:}\b0 \fs20\cf0\f0\charscalex100 { Capital
markets, cash flow, accruals, earnings, value
relevance. }\par\pard\sect\sectd\sbknone\cols2\colno1\colw5946\colsr-
0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
306\slmult0 \fs20\cf0\f0\charscalex100\b {1. INTRODUCTION }\b0
\par\pard\li893\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 {Active stock
investors turn to financial statement analysis }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {to ascertain the fundamental value of
firms. They want to}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{know what firms are worth so that they can evaluate the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {respective stock prices. In fact, one of
the major objectives in}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {financial reporting is to provide equity investors with
infor-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {mation
relevant for estimating company value. Value rele-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {vance research empirically analyses whether
this goal is met. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Is accounting information relevant for the investors who}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {wish to estimate company value, or do
investors primarily}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{obtain the information they need from other sources? An }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {extensive accounting literature seeks to
answer a large num-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ber of aspects of this question, and this literature as a
whole }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {is referred
to as the value relevance literature. The purpose of }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {this study is to review the value relevance
literature in order}\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{to give the reader a comprehensive understanding of the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {methodology, research questions, and
empirical findings in}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{this line of research.}\par\pard\li613\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { Empirical research on the relations between capital
mar-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {kets and
financial statements is generally referred to as capi-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tal market-based accounting research
(CMBAR). This is a }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{broad field of research that can be categorised into
several}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {subfields.
Kothari [1] divides CMBAR into fundamental }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {analysis and valuation, tests of market efficiency, and
the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {role of
accounting numbers in contracts and the political}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {process. Beaver [2] employs the sub-
categories market effi-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ciency, Feltham-Ohlson modelling, value relevance,
analyst}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {behaviour,
and discretionary behaviour. Categorisation of}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {CMBAR is largely a matter of preference,
and value rele-}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{vance research can be used as an example of this. Beaver
[2] }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{*Address correspondence to this author at the Faculty of Economics
and }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Social
Sciences, University of Agder, 4604 Kristiansand, Norway; }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {E-mail:
leif.a.beisland@uia.no}\par\column\pard\li0\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li0\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100 {views value
relevance as a field of its own. It is, however, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {possible to consider value relevance as
related to both market }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{efficiency and fundamental analysis and valuation. }\par\pard\li0\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 { This paper is a descriptive study of a
wide selection of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{value relevance research. It focuses on what the results
from }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value relevance
research }\fs20\cf0\f0\charscalex100\i {are}\i0 \fs20\cf0\f0\charscalex100 {, and
not what they }\fs20\cf0\f0\charscalex100\i {should have }\i0 \par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100\i {been}\i0 \fs20\cf0\f0\charscalex100 {. It
should be noted, however, that most standard setters }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {view value relevance, along with other
attributes, as an im-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{portant characteristic of accounting information. Francis, }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {LaFond and Olsson [3] suggest that
increased value rele-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{vance is associated with lower cost of equity. This is
attrib-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {uted to
investors perceiving value relevance as contributing}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {to lower information risk. Lower
information risk decreases }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {imprecision in the estimates of the pay-off structure
to inves-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tors based
on available information. Simply put, lower risk }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {means lower company cost of equity. From a
macroeco-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {nomic
perspective, lower cost of capital leads to increasing }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {levels of investment. As such, value
relevance might have }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{real consequences for an economy. It is useful to keep
such }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {normative
considerations in mind, even though the remain-}\par\pard\li0\ri0\sl-226\slmult0
\*\tx4146\fs20\cf0\f0\charscalex100 {der of this paper almost exclusively focuses
on}\tab \fs20\cf0\f0\charscalex100\i {empirical }\i0 \par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {relationships. The literature in this area
is vast, and it is by }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{no means my intention to provide an all-embracing review of }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the research. I do, however, present a
relatively large number }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {of articles in order to give
an }\fs20\cf0\f0\charscalex100\i {overview}\i0 \fs20\cf0\f0\charscalex100 { of the
value relevance }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{literature. Modern CMBAR originated with Ball and Brown }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {[4] and Beaver [5]. Both articles can be
seen as a part of the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{value relevance literature, although the concept of value }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {relevance, according to Barth, Beaver and
Landsman [6], }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {was not
developed until 1993 [7]. I focus primarily on recent}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {research, i.e., articles from the last
twenty years. Many of the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {\uc1\u8220Xmodern classics\uc1\u8221X within value
relevance research were }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {actually produced during the
nineties. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { The
articles discussed here were primarily selected from }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the most well-known and respected
accounting journals, }\par\pard\sect\sectd\sbknone\pard\li4613\ri0\sl-
\fs18\cf0\par\pard\li4613\ri0\sl-186\slmult0 \*\tx5933\fs16\cf0\f0\charscalex100\b
{1874-9151/09 }\b0 \tab \fs16\cf0\f0\charscalex100\b {2009 Bentham Open }\b0
\par\pard\sect\sectd\sbknone\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
{\shp{\*\shpinst\shpleft7826\shptop7506\shpright9133\shpbottom7506\shpfhdr0\shpwr3\
shpwrk0\shpfblwtxt1\shplid2035\shpz4\shpbxpage\shpbypage
{\sp{\sn pVerticies}{\sv 8;2;(0,0);(1306,0);}}
{\sp{\sn pSegmentInfo}{\sv 2;5;16384;45824;1;45824;32768}}
{\sp{\sn lineWidth}{\sv 6363}}
{\sp{\sn lineColor}{\sv 0}}
{\sp{\sn lineDashing}{\sv 0}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
1}}}}\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\margtsxn666\margbsxn200\cols2
\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100\b {8 }\b0 \fs16\cf0\f0\charscalex100\b \i {The Open
Business Journal, 2009, Volume 2 }\b0 \i0 \par\pard\li613\ri0\sl-426\slmult0
\fs20\cf0\f0\charscalex100 {including the Journal of Accounting Research, the
Journal of}\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{Accounting and Economics, Contemporary Accounting}\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {Research, Accounting Review, the Journal of
Accounting}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Auditing
and Finance, and the Journal of Business Finance }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {and Accounting, but I also comment on
important results }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{from other journals. No reference is made to unpublished}\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {working papers. This paper primarily
focuses on research }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{performed using U.S. data, but I also provide examples
of }\par\column\pard\li3680\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
{Leif Atle Beisland }\b0 \i0 \par\pard\li293\ri0\sl-426\slmult0
\fs20\cf0\f0\charscalex100 {In this model, the expected dividend is budgeted as the
free}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cash flow to
equity. Several versions of this dividend and cash}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {flow model exist. For instance, Feltham and Ohlson [9]
show }\par\pard\li0\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100 {that under some
fairly reasonable assumptions,}{\super \fs12\up3\cf0\f0\charscalex100
{3}}\fs20\cf0\f0\charscalex100 { equity value is }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {today\uc1\u8217Xs value of net financial
assets plus the present value of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {all future free cash flow from operating
activities: }\par\pard\li1546\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100\i {E
CFO}\i0 \par\pard\li40\ri0\sl-506\slmult0 \*\tx1693\fs20\cf0\f0\charscalex100\i
{EV}\i0 {\sub \fs12\cf0\f0\charscalex100 {0}}\fs20\cf0\f1\charscalex100 {=}
{ }\fs20\cf0\f0\charscalex100\i {NFA}\i0 {\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f1\charscalex100 {+}\tab \fs28\cf0\f1\charscalex100\ul {(}\ul0
{\sub \fs12\cf0\f0\charscalex100\i \ul {t}\i0 \ul0 }\fs28\cf0\f1\charscalex100\ul
{)}\ul0
\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\cols2\
colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {value relevance studies from several other countries.}
{\super \fs12\up3\cf0\f0\charscalex100 {1}}\fs20\cf0\f0\charscalex100 { As
the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {U.S. financial
market is by far the world\uc1\u8217Xs largest, it should}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {come as no surprise that modern CMBAR
originated in the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{USA. A very large fraction of published value relevance }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {research is still conducted using U.S.
samples. These U.S. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{studies include most of the pioneering research that has
been }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {performed on
value relevance. }\par\pard\li1106\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Fig.}\fs20\cf0\f0\charscalex100 {) outlines the structure of this paper. Section 2
}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {defines the concept
of value relevance and describes its theo-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {retical foundation. Section 3 discusses research
methodology}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {applied
in the analysis of value relevance. Sections 4 to 7}\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {present four sub-categories
of}\fs18\cf0\f0\charscalex100 { empirical value relevance }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {research. Note that much of the value
relevance literature can }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {be easily placed into two or more categories. Some
articles }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {will
therefore be cited several times. Section 4 describes the }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {value relevance of earnings and other flow
measures, such as }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{the value relevance of elements from income statements or }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cash flow statements. The value relevance
of earnings can be }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{regarded as the primary focus of value relevance
research. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Hence,
section 4 is the most comprehensive of this paper. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Section 5 investigates the value relevance
of balance sheet}\par\column\pard\li1306\ri0\sl-360\slmult0
\fs12\cf0\f0\charscalex100\i {t}\i0 { }\fs12\cf0\f1\charscalex100
{=}\fs12\cf0\f0\charscalex100 {1}{\super \fs28\up-2\cf0\f1\charscalex100
{(}}\fs20\cf0\f0\charscalex100 {1}\fs20\cf0\f1\charscalex100 {+}
{ }\fs20\cf0\f0\charscalex100\i {r}\i0 { }\fs28\cf0\f1\charscalex100 {)}{\super
\fs12\up6\cf0\f0\charscalex100\i {t}\i0 }\par\pard\li0\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {NFA}{\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f0\charscalex100 { = net financial assets (negative if debts exceed
gross }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {financial
assets) }\par\pard\li0\ri0\sl-280\slmult0 \fs20\cf0\f0\charscalex100 {CFO}{\sub
\fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 { = free cash flow from
operating activities }\par\pard\li293\ri0\sl-293\slmult0 \fs20\cf0\f0\charscalex100
{Ohlson [11] shows that the dividend and cash flow model}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {can be written solely as a function of
accounting variables if}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{we assume that the clean surplus relation (CSR) holds.}{\super
\fs12\up3\cf0\f0\charscalex100 {4}}\fs20\cf0\f0\charscalex100
{ The }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {CSR requires
that book equity only changes with net income }\par\pard\li0\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {and net capital withdrawals (net dividends) by owners:}
{\super \fs12\up3\cf0\f0\charscalex100 {5}}\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {B}{\sub \fs12\cf0\f0\charscalex100
{t}}\fs20\cf0\f0\charscalex100 { = B}{\sub \fs12\cf0\f0\charscalex100 {t-
1}}\fs20\cf0\f0\charscalex100 {+ I}{\sub \fs12\cf0\f0\charscalex100
{t}}\fs20\cf0\f0\charscalex100 { - d}{\sub \fs12\cf0\f0\charscalex100
{t}}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {B}{\sub
\fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 { = book value of equity
}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {I}{\sub
\fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 { = net income
(earnings)}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {d}{\sub
\fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 { = net
dividends }\par\pard\li0\ri0\sl-293\slmult0 \fs20\cf0\f0\charscalex100 {Using this
assumption, the residual income}{\super \fs12\up3\cf0\f0\charscalex100
{6}}\fs20\cf0\f0\charscalex100 { model can be }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {derived: }\par\pard\li1226\ri0\sl-253\slmult0
\fs20\cf0\f0\charscalex100\i {E I}\i0 \par\pard\li40\ri0\sl-506\slmult0
\*\tx1453\fs20\cf0\f0\charscalex100\i {EV}\i0 {\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f1\charscalex100 {=}{ }\fs20\cf0\f0\charscalex100\i {B}\i0 {\sub
\fs12\cf0\f0\charscalex100 {0}}\fs20\cf0\f1\charscalex100 {+}\tab
\fs28\cf0\f1\charscalex100 {(}{\sub \fs12\cf0\f0\charscalex100\i
{t}\i0 }\fs20\cf0\f0\charscalex100\i {r}\i0 { }\fs20\cf0\f0\charscalex100 {*}
{ }\fs20\cf0\f0\charscalex100\i {B}\i0 {\sub \fs12\cf0\f0\charscalex100\i
{t}\i0 }\fs12\cf0\f0\charscalex100 {1}{\super \fs28\up0\cf0\f1\charscalex100
{)}}\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\co
ls3\colno1\colw6946\colsr-0\colno2\colw573\colsr-
0\colno3\colw3920\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{measures, i.e., equity and other stock measures. Section
6}\par\column\pard\li0\ri0\sl-160\slmult0 \fs12\cf0\f0\charscalex100\i {t}\i0
\fs12\cf0\f1\charscalex100 {=}\fs12\cf0\f0\charscalex100
{1}\par\column\pard\li0\ri0\sl-360\slmult0 \fs28\cf0\f1\charscalex100
{(}\fs20\cf0\f0\charscalex100 {1}{ }\fs20\cf0\f1\charscalex100 {+}
{ }\fs20\cf0\f0\charscalex100\i {r}\i0 { }\fs28\cf0\f1\charscalex100 {)}{\super
\fs12\up6\cf0\f0\charscalex100\i
{t}\i0 }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn13
3\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {analyses research on the development of value relevance
}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {over time. A very
specific type of value relevance research }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {focuses on the differing value relevance of alternative
ac-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {counting methods
or standards. This kind
of research is re-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{viewed in section 7. Section 8 concludes the paper. }\par\pard\li613\ri0\sl-
\fs20\cf0\f0\charscalex100\b {2. THEORETICAL FOUNDATION AND A DEFINI-}\b0
\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100\b {TION }\b0
\par\pard\li893\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 {Financial statements
have a variety of applications. Man-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {agement compensation and debt contracting are examples
of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {applications of
financial statements. However, this paper is }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {solely devoted to equity investment. Value relevance
re-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {search
measures }\fs20\cf0\f0\charscalex100\i {the usefulness of accounting
information}\i0 \par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100\i
{from the perspective of equity investors}\i0 \fs20\cf0\f0\charscalex100 {.
Empirical research }\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{is based on valuation theory. Traditional financial
theory }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {states that
the theoretical value of a company\uc1\u8217Xs equity, EV,
is }\par\pard\li613\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {the present
value of all future dividends}{\super \fs10\up3\cf0\f0\charscalex100
{2}}\fs18\cf0\f0\charscalex100 { (d) or free cash }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {flows to equity
(FCE): }\par\pard\li1506\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100\i {E
d}\i0 \par\pard\li653\ri0\sl-493\slmult0
\*\tx1653\*\tx2520\fs20\cf0\f0\charscalex100\i {EV}\i0 {\sub
\fs12\cf0\f0\charscalex100 {0}}\fs20\cf0\f1\charscalex100 {=}\tab
\fs28\cf0\f1\charscalex100\ul {( )}\ul0 {\sub \fs12\cf0\f0\charscalex100\i
{t}\i0 }\fs20\cf0\f1\charscalex100 {=}\tab \fs20\cf0\f0\charscalex100\i {E FCE}\i0
{\sub \fs12\cf0\f0\charscalex100\i {t}\i0 }\fs28\cf0\f1\charscalex100\ul {)}\ul0
\par\column\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { The model
says that the value of a company\uc1\u8217Xs equity is }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {equal to the book value of equity plus the
discounted value }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of
future residual income. Residual (or abnormal) income is }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {defined as the difference between
accounting income and the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {required return on book value of equity and is computed
}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {using market-based
company cost of capital. Note that the }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {residual income model is always equal to the dividend
model}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {if one assumes
that the CSR holds in the future. It does not}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {matter if the CSR has not been valid
historically. }\par\pard\li0\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100 { These
models are used by equity investors to estimate }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {company value. One objective of financial
reporting is to}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {assist
investors in equity valuation. For financial information }\par\pard\li0\ri0\sl-
\fs18\cf0\par\pard\li0\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{3}\fs16\cf0\f0\charscalex100 { Specifically, the Financial Asset Relation (FAR)
and the Financial Asset }\par\pard\li0\ri0\sl-186\slmult0
\fs14\cf0\f0\charscalex100 {Marked-to-Market Relation (FAM) must hold. FAR says
that all transfers to }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{common equity holders are made through financial assets, and these
assets }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {are further
influenced by financial income and free cash flows from
opera-}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {tions. FAM says
that the risk-adjusted expected financial income equals the }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {riskless spot interest rate times the
opening book value of financial assets }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100
{[10]. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn13
3\cols3\colno1\colw2280\colsr-0\colno2\colw3666\colsr-
0\colno3\colw5493\pard\li1213\ri0\sl-360\slmult0 \fs12\cf0\f0\charscalex100\i
{t}\i0 \fs12\cf0\f1\charscalex100 {=}\fs12\cf0\f0\charscalex100 {1}{\super
\fs28\up-2\cf0\f1\charscalex100 {(}}\fs20\cf0\f0\charscalex100
{1}\fs20\cf0\f1\charscalex100 {+}{ }\fs20\cf0\f0\charscalex100\i {r}\i0
{ }\fs28\cf0\f1\charscalex100 {)}{\super \fs12\up6\cf0\f0\charscalex100\i
{t}\i0 }\par\column\pard\li0\ri0\sl-360\slmult0 \fs12\cf0\f0\charscalex100\i {t}\i0
\fs12\cf0\f1\charscalex100 {=}\fs12\cf0\f0\charscalex100 {1}{\super \fs28\up-
2\cf0\f1\charscalex100 {(}}\fs20\cf0\f0\charscalex100 {1}
{ }\fs20\cf0\f1\charscalex100 {+}{ }\fs20\cf0\f0\charscalex100\i {r}\i0
{ }\fs28\cf0\f1\charscalex100 {)}{\super \fs12\up6\cf0\f0\charscalex100\i
{t}\i0 }\par\column\pard\li0\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{4}\fs16\cf0\f0\charscalex100 { The idea of residual income valuation is, in fact,
far older than the mid-}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{nineties. The model is actually sometimes attributed to Preinrich
[12], }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133
\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {EV}{\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f0\charscalex100 {= (theoretical) equity
value }\par\pard\li613\ri0\sl-320\slmult0 \*\tx1320\fs20\cf0\f0\charscalex100 {E(d}
{\sub \fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 {)}\tab
\fs20\cf0\f0\charscalex100 {= expected dividend}\par\pard\li613\ri0\sl-
320\slmult0 \fs20\cf0\f0\charscalex100 {E(FCE}{\sub \fs12\cf0\f0\charscalex100
{t}}\fs20\cf0\f0\charscalex100 {) = expected free cash flow to
equity }\par\pard\li613\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {r}{\sub
\fs12\cf0\f0\charscalex100 {t}}\fs20\cf0\f0\charscalex100 { = discount
rate }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
{1}\fs16\cf0\f0\charscalex100 { Note that the references to international studies
were collected from a }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {wider range of journals than the ones listed
above. }\par\pard\li613\ri0\sl-200\slmult0 \fs10\cf0\f0\charscalex100
{2}\fs16\cf0\f0\charscalex100 { The dividend model is often attributed to Williams
[8]. }\par\column\pard\li0\ri0\sl-200\slmult0 \fs16\cf0\f0\charscalex100 {whereas
Edwards and Bell [13] further develop the ideas. It was,
however, }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {not until
the works of Feltham and Ohlson that the model gained its
huge }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{popularity. }\par\pard\li0\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{5}\fs16\cf0\f0\charscalex100 { Change in equity that is not a result of net
dividends or bottom-line earn-}\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {ings is referred to as \uc1\u8220Xdirty
surplus.\uc1\u8221X Value changes, for instance revalua-}\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {tions or changes in derivatives values, are
sometimes recorded as an equity }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {change rather than an earnings item. The equity may
also be adjusted for }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{exchange rate changes [14]. Such direct adjustments to equity are
examples }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {of dirty
surplus items.}\par\pard\li0\ri0\sl-200\slmult0 \fs10\cf0\f0\charscalex100
{6}\fs16\cf0\f0\charscalex100 { This model is also referred to as the residual
earnings model. Earnings and }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {income are used interchangeably in this paper, and both
refer to the net}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{accounting profit or loss reported in financial
statements. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margr
sxn133\pard\sect\sectd\sbkpage
{\sp{\sn pVerticies}{\sv 8;3;(240,1573);(0,1573);(0,0);}}
{\sp{\sn pSegmentInfo}{\sv 2;7;16384;45824;1;45824;1;45824;32768}}
{\sp{\sn pVerticies}{\sv 8;3;(0,1573);(240,1573);(240,0);}}
{\sp{\sn pSegmentInfo}{\sv 2;7;16384;45824;1;45824;1;45824;32768}}
{\sp{\sn pVerticies}{\sv 8;4;(2546,3133);(2546,3000);(0,3000);(0,0);}}
{\sp{\sn pSegmentInfo}{\sv 2;9;16384;45824;1;45824;1;45824;1;45824;32768}}
{\sp{\sn pVerticies}{\sv 8;86;(240,0);(226,0);(200,0);(186,13);(160,13);(146,13);
(133,26);(120,40);(93,53);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,53);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,53);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,53);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1346,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1346,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1346,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1346,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(173,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1346,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1346,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(173,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1346,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1346,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1413);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1413);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1440,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1440,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(40,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(40,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1440,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1440,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);(240,0);}}
2;174;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;1;45824;24577;32768}}
(133,26);(120,40);(93,40);(80,53);(66,66);(53,80);(53,93);(40,120);(26,133);
(13,146);(13,160);(13,186);(0,200);(0,226);(0,240);(0,1320);(0,1346);(0,1360);
(13,1386);(13,1400);(13,1426);(26,1440);(40,1453);(53,1466);(53,1480);(66,1493);
(80,1506);(93,1520);(120,1533);(133,1546);(146,1546);(160,1560);(186,1560);
(200,1560);(226,1573);(240,1573);(1213,1573);(1226,1573);(1253,1560);(1266,1560);
(1293,1560);(1306,1546);(1320,1546);(1333,1533);(1360,1520);(1373,1506);
(1386,1493);(1400,1480);(1413,1466);(1413,1453);(1426,1440);(1440,1426);
(1440,1400);(1453,1386);(1453,1360);(1453,1346);(1453,1320);(1453,240);(1453,226);
(1453,200);(1453,186);(1440,160);(1440,146);(1426,133);(1413,120);(1413,93);
(1400,80);(1386,66);(1373,53);(1360,40);(1333,40);(1320,26);(1306,13);(1293,13);
(1266,13);(1253,0);(1226,0);(1213,0);(240,0);}}
2;172;16384;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1
;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45
824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824
;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;
45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;458
24;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;
1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4
5824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;45824;1;4582
4;1;45824;1;45824;1;45824;24577;32768}}
\colno1\colw4293\colsr-0\colno2\colw3346\colsr-0\colno3\colw3800\pard\li613\ri0\sl-
253\slmult0 \fs16\cf0\f0\charscalex100\b \i {A Review of the Value Relevance
Literature }\b0 \i0 \par\column\pard\li1053\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li1053\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li1053\ri0\sl-
{Value }\par\pard\li800\ri0\sl-333\slmult0 \fs32\cf0\f0\charscalex100
{Relevance }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
\fs18\cf0\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li0\ri0\sl-240\slmult0 \*\tx2000\fs22\cf0\f0\charscalex100
{Theoretical }\tab \fs22\cf0\f0\charscalex100 {Empirical }\par\pard\li0\ri0\sl-
213\slmult0 \*\tx2093\fs22\cf0\f0\charscalex100 {Foundation }\tab
\fs22\cf0\f0\charscalex100 {Testing }\par\pard\li40\ri0\sl-213\slmult0
\*\tx1973\fs20\cf0\f0\charscalex100 {(Section 2)}\tab \fs20\cf0\f0\charscalex100
{(Section 3) }\par\column\pard\li0\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009, Volume
2 }\b0 \i0 { }\fs16\cf0\f0\charscalex100\b {9}\b0
colno1\colw4213\colsr-0\colno2\colw1706\colsr-0\colno3\colw1693\colsr-
{Value Relevance }\par\pard\li2546\ri0\sl-200\slmult0 \fs22\cf0\f0\charscalex100
{of Earnings and }\par\pard\li2720\ri0\sl-213\slmult0 \fs22\cf0\f0\charscalex100
{Other Flow }\par\pard\li2786\ri0\sl-213\slmult0 \fs22\cf0\f0\charscalex100
{Measures }\par\pard\li2760\ri0\sl-200\slmult0 \fs20\cf0\f0\charscalex100 {(Section
4) }\par\column\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
\fs18\cf0\f0\charscalex100 {Value Relevance }\par\pard\li120\ri0\sl-200\slmult0
\fs22\cf0\f0\charscalex100 {of Equity and }\par\pard\li173\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Other Stock }\par\pard\li280\ri0\sl-213\slmult0
\fs22\cf0\f0\charscalex100 {Measures }\par\pard\li240\ri0\sl-200\slmult0
\fs20\cf0\f0\charscalex100 {(Section 5) }\par\column\pard\li0\ri0\sl-213\slmult0
\fs22\cf0\f0\charscalex100 {Over Time }\par\pard\li226\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {(Section 6) }\par\column\pard\li0\ri0\sl-213\slmult0
\fs22\cf0\f0\charscalex100 {of Alternative }\par\pard\li200\ri0\sl-213\slmult0
\fs22\cf0\f0\charscalex100 {Accounting }\par\pard\li306\ri0\sl-213\slmult0
\fs22\cf0\f0\charscalex100 {Methods }\par\pard\li240\ri0\sl-200\slmult0
\fs20\cf0\f0\charscalex100 {(Section
7) }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\pa
rd\li640\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li640\ri0\sl-333\slmult0
\fs18\cf0\f0\charscalex100\b {Fig. (1).}\b0 { }\fs18\cf0\f0\charscalex100 {Outlines
the structure of the paper. The theoretical foundation of value relevance research
is described in section 2. Section }\fs18\cf0\f0\charscalex100 {3
dis-}\par\pard\li640\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {cusses
empirical testing within this field of research. The rest of the paper, sections 4
to 7, presents findings from four sub}\fs18\cf0\f0\charscalex100 {-categories
of }\par\pard\li640\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {value relevance
research. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsx
n133\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li613\ri0\sl-280\slmult0 \fs20\cf0\f0\charscalex100 {to be value
relevant, accounting numbers must be related to}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {current company value. If there is no
association between }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{accounting numbers and company value, accounting infor-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {mation cannot be termed value relevant, and
hence, financial}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{reports are unable to fulfil one of their primary
objectives. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {The
construct of value relevance can be defined in a number}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {of ways. Barth, Beaver and Landsman [6]
simply state that }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{\uc1\u8220Xvalue relevance research examines the association
between }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {accounting
amounts and equity market values\uc1\u8221X [6]. In a more }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {thorough discussion of the construct,
Francis and Schipper}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{[15] offer four interpretations of value relevance.
Interpreta-}\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {tion one
is that financial statement information influences }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {stock prices by capturing intrinsic share
values toward which}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{stock prices drift. Under interpretation two, Francis and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Schipper [15] state that financial
information is value rele-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {vant if it contains the variables used in a valuation
model or }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {assists in
predicting those variables, while interpretation }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {three and four are based on value relevance
as indicated by a }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{statistical association between financial information and}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {prices or returns. Consistent with Francis
and Schipper\uc1\u8217Xs }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {[15] fourth interpretation of value relevance, I define
value }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {relevance
as }\fs18\cf0\f0\charscalex100\i {the ability of financial statement information
to}\i0 \par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100\i {capture and
summarise information that determines the }\i0 \par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100\i {firm\uc1\u8217Xs value}\i0
\fs20\cf0\f0\charscalex100 {. I choose this definition b}\fs20\cf0\f0\charscalex100
{ecause it best describes }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {how empirical value relevance research is actually
con-}\par\pard\li613\ri0\sl-226\slmult0 \*\tx5200\fs20\cf0\f0\charscalex100
{ducted. Value relevance research does not focus on}\tab
\fs20\cf0\f0\charscalex100\i {how}\i0 \par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {accounting information is used in valuation. Instead,
this line }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of
research asks if accounting information is able }\fs20\cf0\f0\charscalex100\i {ex
post}\i0 \fs20\cf0\f0\charscalex100 { to}\par\column\pard\li0\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li0\ri0\sl-280\slmult0 \fs20\cf0\f0\charscalex100 {explain
variations in stock prices over time and/or between}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {companies. }\par\pard\li0\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100\b {3. EMPIRICAL TESTING }\b0
\par\pard\li0\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { Section 3.1
discusses how models can be specified to }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {analyse value relevance of accounting information.
The }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {typical
statistical test methodology is regression analysis. }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {There are, however, several econometric
challenges related}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {to
the regression models most frequently applied
in value }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {relevance
research. Some of these challenges are discussed }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {in section 3.2. In addition, value
relevance research generally}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {assumes that financial markets are efficient. Section
3.3}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {examines test
methodology that may be applied if the as-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {sumption of market efficiency
is }\fs20\cf0\f0\charscalex100\i {not}\i0 \fs20\cf0\f0\charscalex100
{ met. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100\b {3.1. Model Specification }\b0
\par\pard\li0\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 { The main objective
of value relevance research is to }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {study the relationship between market values of equity
and}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {accounting
variables, formally defined as:}\par\pard\li0\ri0\sl-320\slmult0
\*\tx4253\fs20\cf0\f0\charscalex100 {MVE = f (AI) }\tab \fs20\cf0\f0\charscalex100
{ (1)}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {MVE =
market value of equity}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100
{AI = accounting information}\par\pard\li0\ri0\sl-333\slmult0
\fs20\cf0\f0\charscalex100 { Value relevance researchers are interested in how
ac-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {counting
information affects market values of equity. One }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {may, for instance, study if one particular
piece of }\fs20\cf0\f0\charscalex100 {accounting}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {information is significantly related to the
market value
of }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\pa
rd\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
Business Journal, 2009, Volume 2}\b0 \i0 \par\pard\li613\ri0\sl-426\slmult0
\fs20\cf0\f0\charscalex100 {equity, or one may study how much variation in equity
val-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ues is
explained by accounting information. Such issues
are }\par\column\pard\li3680\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
\fs20\cf0\f0\charscalex100 {from time-series models of earnings [21, 22]. The
regression }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {is
then:}\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\
cols3\colno1\colw5946\colsr-0\colno2\colw4253\colsr-
0\colno3\colw1240\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{typically tested using regression analysis. In particular,
the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {first research
question can be answered by studying the sig-}\par\column\pard\li0\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 {AR= }{\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f0\charscalex100 { +}{\sub \fs12\cf0\f0\charscalex100
{1}}\fs20\cf0\f0\charscalex100 {UE + }\fs20\cf0\f0\charscalex100
{ }\par\column\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100
{ (5) }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\marg
rsxn133\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {nificance level of individual regression coefficients,
while }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the second
issue can be analysed through a study of the ex-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {planatory power of a regression
model. }\par\pard\li893\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {One of the
most central regression specifications in value }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance research is the price regression. The price
regres-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {sion
analyses the relationship between the market value of }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {equity and the book value of equity. The
regression is typi-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{cally run on a per share basis: }\par\pard\li613\ri0\sl-346\slmult0
\*\tx1080\*\tx4866\fs20\cf0\f0\charscalex100 {P }\tab \fs20\cf0\f0\charscalex100
{= }{\sub \fs12\cf0\f0\charscalex100 {0}}\fs20\cf0\f0\charscalex100 { +}{\sub
\fs12\cf0\f0\charscalex100 {1}}\fs20\cf0\f0\charscalex100 {BVS
+ }\fs20\cf0\f0\charscalex100 { }\tab \fs20\cf0\f0\charscalex100
{ (2) }\par\pard\li613\ri0\sl-293\slmult0
\*\tx1080\fs20\cf0\f0\charscalex100 {P }\tab \fs20\cf0\f0\charscalex100 {= stock
price }\par\pard\li613\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {BVS = book
value per share }\par\pard\li613\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100
{ The residual income framework (see section 2) shows }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {that stock values can be estimated as a
function of the book}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{value of equity and earnings. As such, earnings are often}\par\pard\li613\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {included as a second variable in the price
specification:}{\super \fs12\up3\cf0\f0\charscalex100
{7}}\par\column\pard\li0\ri0\sl-213\slmult0 \*\tx720\fs20\cf0\f0\charscalex100 {AR
}\tab \fs20\cf0\f0\charscalex100 {= abnormal return, i.e., stock return minus
expected }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{return}\par\pard\li0\ri0\sl-306\slmult0 \*\tx720\fs20\cf0\f0\charscalex100
{UE }\tab \fs20\cf0\f0\charscalex100 {= unexpected earnings}{\super
\fs12\up3\cf0\f0\charscalex100 {9}}\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { Note that there is no rigid definition of the
earnings re-}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {sponse
coefficient. The coefficient }{\sub \fs12\cf0\f0\charscalex100
{1}}\fs20\cf0\f0\charscalex100 { from specification (5)}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {is often referred to as the earnings
response coefficient as }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {well. }\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { The regression specifications so far have implicitly
as-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {sumed that
aggregate accounting numbers like bottom-line }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {earnings and book equity are the metrics of interest.
How-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ever, these
aggregated measures are sometimes disaggre-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {gated into components (see sections 4.3 and 5.1). Note
also }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {that value
relevance can be analysed for financial statement }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {information that is not part of an income statement or
bal-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ance sheet. Such
information includes, for instance, informa-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {tion from the notes or numbers from cash flow
statements. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margr
sxn133\cols3\colno1\colw4866\colsr-0\colno2\colw1080\colsr-
0\colno3\colw5493\pard\li613\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 {P = }
{\sub \fs12\cf0\f0\charscalex100 {0}}\fs20\cf0\f0\charscalex100 { +}{\sub
\fs12\cf0\f0\charscalex100 {1}}\fs20\cf0\f0\charscalex100 {BVS + }{\sub
\fs12\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {EPS
+ }\fs20\cf0\f0\charscalex100 { }\par\pard\li613\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {EPS = earnings per share }\par\column\pard\li0\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 { (3) }\par\column\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Value relevance research includes time-
series analysis and }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{cross-sectional analysis as well as both at the same time,
as }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {in panel data
analysis. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsx
\fs20\cf0\f0\charscalex100 { Equity valuation is an important exercise for all
stock }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {investors.
However, once funds have been invested in a }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {stock or a portfolio of stocks, the stock price per se
is not}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {necessarily
of much interest. The focus is instead on the }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {investment return. Assuming that the clean
surplus relation }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{holds (see the definition in section 2), the change in the
book}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value of equity
is equal to earnings if no dividends are paid. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {The value relevance research devotes much
attention to how}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the
change in the market value of equity is related to value }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {creation as measured by the accounting
system. This issue is }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {typically studied by regressing the change in stock
price, or }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{specifically the stock return, on accounting earnings:}{\super
\fs12\up3\cf0\f0\charscalex100 {8}}\par\column\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { The relationship between stock values or returns
and }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {accounting
numbers can be examined for different time hori-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {zons. Research on stock price reactions
over short periods of }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{time is referred to as event studies, while analyses of
long-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {term
relationships are called association studies. Event stud-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ies typically analyse stock price behaviour
centred on an-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{nouncement dates for which the time window may be as }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {short as a day or two. Association studies
are not concerned}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {with
how fast the market reacts to new information, as their }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {horizon ranges from three or four months to
several years. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {This
paper concentrates on association studies, though the }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {distinction between the two in many cases
is
somewhat }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn
133\cols3\colno1\colw4866\colsr-0\colno2\colw1080\colsr-
0\colno3\colw5493\pard\li613\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {R= }{\sub \fs12\cf0\f0\charscalex100
{0}}\fs20\cf0\f0\charscalex100 { +}{\sub \fs12\cf0\f0\charscalex100
{1}}\fs20\cf0\f0\charscalex100 {E + }\fs20\cf0\f0\charscalex100
{ }\par\column\pard\li0\ri0\sl-293\slmult0 \fs20\cf0\f0\charscalex100
{ (4) }\par\column\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{blurred. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsx
\fs20\cf0\f0\charscalex100 {E = earnings; typically scaled by total assets or the
market }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {value of
equity }\par\pard\li893\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100
{Specification (4) can be applied to study the timeliness
of }\par\pard\li613\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100 {bottom-line
earnings. The coefficient on earnings,}{\sub \fs12\cf0\f0\charscalex100
{1}}\fs20\cf0\f0\charscalex100 {, is }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {often referred to as the earnings response coefficient,
and it}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {is understood
as "the magnitude of the relation between }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {stock returns and earnings" [1]. Value relevance
researchers }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{sometimes focus on unexpected return rather than the
stock }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {return
itself. Unexpected return is computed by deducting}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {expected return from raw stock return.
Expected return can }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{be estimated in several ways, for instance by using the
mar-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ket model or
the Fama and French three-factor model [17, }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {18]. Unexpected stock return is regressed on unexpected
}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {earnings.
Unexpected earnings are the difference between }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {total earnings and expected earnings.
Expected earnings can, }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {for instance, be calculated from analyst forecasts [19,
20] or}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
266\slmult0 \fs10\cf0\f0\charscalex100 {7}\fs16\cf0\f0\charscalex100 { Earnings and
book value multiples are frequently applied to calculate }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {approximate equity values. Penman [16]
shows how the two multiples can }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {be combined in equity valuation. Specifically, Penman
[16] calculates }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{weights that combine capitalised earnings and book values into equity
price. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Regression
specification (3) is in principle equal to Penman\uc1\u8217Xs
valuation}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{model. }\par\pard\li613\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{8}\fs16\cf0\f0\charscalex100 { The return specification can also be seen as a
response to scale problems in }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {the so-called level (or price) specifications; see
section 3.2.1. }\par\column\pard\li0\ri0\sl-333\slmult0
\fs18\cf0\f0\charscalex100\b {3.2. Econometric Issues }\b0 \par\pard\li293\ri0\sl-
346\slmult0 \fs20\cf0\f0\charscalex100 {Section 3.2.1 evaluates econometric
challenges related to }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{the price regression and the return regression,
respectively. }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Section
3.2.2 discusses why researchers must be careful in}\par\pard\li0\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {some cases when employing explanatory power, R}
{\super \fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {, as
a }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {measure of value
relevance. }\par\pard\li0\ri0\sl-306\slmult0 \fs18\cf0\f0\charscalex100\b \i
{3.2.1. Return vs Level Specification }\b0 \i0 \par\pard\li0\ri0\sl-333\slmult0
\fs20\cf0\f0\charscalex100 { Misspecified models can cause researchers to draw the
}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {wrong conclusions
from their analyses. Econometric issues }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {can therefore be an important challenge in much
empirical }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {research.
An important and ongoing debate is connected to}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {the difference between a price level specification
(specifica-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tions (2)
and (3)) and a price change (return) specification}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {(specifications (4) and (5)) when investigating the
relation-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ship between
market values of stocks and accounting values. }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {This issue is thoroughly analysed by Landsman and
Ma-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {gliolo [23]. They
present evidence that there is no single }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {correct answer as to the \uc1\u8220Xbest\uc1\u8221X
model specification. Instead, }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {they argue that the decision of whether to select a
price level}\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
{9}\fs16\cf0\f0\charscalex100 { In their simplest form, unexpected
ear}\fs16\cf0\f0\charscalex100 {nings can be estimated as the
change }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {in
earnings, }\fs16\cf0\f0\charscalex100
{E.}\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\pa
rd\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\margtsxn666\m
argbsxn213\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-
Literature }\b0 \i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100
{or a price change specification is a joint function of the
na-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ture of the
econometric properties of the data that cause }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ordinary least squares (OLS) assumptions to
be violated and}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the
economic model of equilibrium that is assumed. }\par\pard\li893\ri0\sl-
306\slmult0 \fs20\cf0\f0\charscalex100 {The different properties of the two
specifications necessi-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tate that researchers need to be aware of the
econometric }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{strengths and weaknesses with the two specifications. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Kothari and Zimmerman [24] claim that price
models are }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {better
specified in that the estimated slope coefficients from }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {price models, but not return models, are
unbiased. Return }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{models, however, more often meet the assumptions behind }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {statistical tools, such as regression
analysis. An example is }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {useful to illustrate this. Current earnings include
both a sur-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {prise
component and an expected component. The latter is }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {referred to as a stale component by Kothari
and Zimmerman}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[24].
They maintain that this stale component is irrelevant in}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {explaining current return and thus
constitutes an error in the }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {independent variable. This results in the slope
coefficient in}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the
return specification being biased towards zero. The price }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {specification does not suffer from this
problem, because the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{stock price reflects the cumulative information content
of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {both components.
Current earnings are, however, uncorre-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {lated with the information
about }\fs20\cf0\f0\charscalex100\i {future}\i0 \fs20\cf0\f0\charscalex100
{ earnings contained in}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {the current stock price [see also 25]. This does not
bias the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {estimated
slope coefficient, but the price model has an un-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {correlated omitted variable that reduces
explanatory power. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{In addition, price models more frequently reject tests of}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {heteroskedasticity. An important
implication from these }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {shortcomings is that researchers using price models
must }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {exercise more
care in drawing statistical inferences. An addi-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tional advantage of the return model is that this model
ren-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ders possible
the use of a market model design, and the re-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {sults can then be interpreted in terms of the capital
asset }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {pricing model
(CAPM). Kothari and Zimmerman [24] point}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {out that in the presence of value-irrelevant noise in
earnings, }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {both
specifications yield downward-biased coefficient esti-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {mates. }\par\pard\li613\ri0\sl-
320\slmult0 \fs20\cf0\f0\charscalex100 { Kothari and Sloan [26] acknowledge that
ERCs from }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {return
specifications are biased downwards [compare 21, 27, }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {28], and they offer a solution to this
problem. They reduce }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{the bias by using a return measurement interval that
includes }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {a leading
time period in addition to the current time period. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Christie [29] observes an extremely
important problem re-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{garding level models. He claims that any variable
correlated}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {with size
will be significant in regressions of equity values }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {on accounting variables. The return
specification controls for}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {this scale effect by deflating all variables with the
market }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {value of
equity. However, the market value of equity is not}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the only deflator used in capital market-
based accounting}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{research. In fact, when per share values are used for
analysis, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the total
number of outstanding shares can be seen as a defla-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tion factor or scale factor. In addition,
many studies use the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{accounting value of assets as the deflation factor [30-
32]. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Barth and
Kallapur [33] do not recommend deflation as a }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {remedy for handling scale effects. They
claim that including }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{a scale proxy as an independent variable in a regression
is }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {more effective
in both reducing heteroskedasticity and miti-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {gating coefficient bias. Alternatively, Easton and
Sommers }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {[34]
recommend market capitalisation as the most appropri-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ate deflation factor. In other words, they
recommend using a }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{return specification. Easton and Sommers [34] claim that
the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {search for
alternative scale proxies is unnecessary. Their}\par\column\pard\li1613\ri0\sl-
253\slmult0 \fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009,
Volume 2 }\b0 \i0 { }\fs16\cf0\f0\charscalex100\b {11}\b0 \par\pard\li0\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100 {analyses are based on the idea that market
capitalisation is }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{more than just a possible scale factor; rather, it }\fs20\cf0\f0\charscalex100\i
{is}\i0 \fs20\cf0\f0\charscalex100 { scale. }\par\pard\li293\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {Regardless of the econometric strengths and
weaknesses }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of the
various regression specifications, the choice of regres-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {sion model in the end is governed by
the }\fs20\cf0\f0\charscalex100\i {economic motiva-}\i0 \par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100\i {tion}\i0 \fs20\cf0\f0\charscalex100 { of
the study. What issues do we seek to investigate, and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {what questions do we seek to answer? The
pure econometric }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{challenges of a model can often be controlled in empirical }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {studies, and numerous possibilities exist
to test the robust-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ness of the conclusions. However, we cannot choose a model}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that is not in accordance with the research
question of the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{study. Barth, Beaver and Landsman [6] offer an instructive }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {explanation on how the economic motivation
of the study}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {should
govern the choice between the two major models in}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {value relevance research: \uc1\u8220Xthe
key distinction between value }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {relevance studies examining price levels and those
examin-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing price
changes, is that the former are interested in deter-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {mining what is reflected in firm value and
the latter are inter-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ested in determining what is reflected in changes in value }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {over a specific period of time\uc1\u8221X
[6]. Thus, the research ques-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tion is decisive. If one wants to examine the value
relevance }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of equity
and other balance sheet items, the price model is }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {the obvious choice. However, if one has a change-
oriented}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {approach in
which}{ }\fs20\cf0\f0\charscalex100\i {value creation}\i0
\fs20\cf0\f0\charscalex100 { is the main focus, a return }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {regression is appropriate, since price
models do not measure }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{the arrival of information over a given period. Sometimes
we }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {want to make
general statements about value relevance, for}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {instance, regarding how value relevance develops over
time }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {(see section 6)
or how value relevance is affected by new}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {accounting standards (see section 7). One should then
follow}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the
recommendation of Kothari and Zimmerman [24] and}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {use both functional forms [35]. This will
also help ensure }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that
the study\uc1\u8217Xs inferences are not sensitive to the choice
of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the functional
form. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100\b \i {3.2.2. The
Use of R}\b0 \i0 {\super \fs12\up3\cf0\f0\charscalex100\b \i {2}\b0
\i0 }\par\pard\li0\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { In regression
analysis, the coefficient of determination }\par\pard\li0\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {(that is, the explanatory power or simply R}{\super
\fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {) measures
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {proportion of
variance in the dependent variable explained}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {by the independent variable(s). If stock prices or
returns are }\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {regressed
on accounting variables, R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { is a measure of how}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {much variation in stock prices or returns
is explained by the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{accounting variables analysed. Hence, explanatory power is }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {a measure of value relevance. The
explanatory power from }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{different samples is often compared to study the extent to}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {which value relevance differs between
samples. For instance, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{when analysing the development in value relevance over}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {time, such comparisons are very common (see
section 6). }\par\pard\li0\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100
{Comparisons of R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 {s based on samples from different
indus-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tries,
accounting standards, or across countries are also fre-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {quent. Brown, Kin and Lys [36] state that
there are severe }\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{problems connected to between-sample comparisons of R}{\super
{-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {levels, and these
comparisons may be invalid. Specifically, }\par\pard\li0\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {scale effects present in price regressions increase R}
{\super \fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {, and
this }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {effect increases
in the scale factor\uc1\u8217Xs coefficient of variation. }\par\pard\li0\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {Thus, differences in R}{\super
\fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {, for instance, from
samples drawn in }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{different time periods may in part be driven by differences
in}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the scale
factor\uc1\u8217Xs coefficient of variation. Brown, Kin and}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Lys [36] control for the scale effect by
running deflated }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{regressions. They acknowledge that several scale proxies }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {could have been chosen, but they argue that
price at time t-1}\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs20\cf0\f0\charscalex100 {is the preferred choice. As such, they recommend using
a }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {version of the
return regression. }\par\pard\li613\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100 {
Gu [37] states that scale effects are not the only reason }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {why explanatory power is incomparable
across samples. He }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{shows that cross-sectional variation in the independent
vari-}\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {able affects
R}{\super \fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {.
Specifically, if two samples have exactly the }\par\pard\li613\ri0\sl-
253\slmult0 \fs20\cf0\f0\charscalex100 {same regression coefficient and residual
variance, the R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { of}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {the samples will differ if the variance of the
independent }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{variable is different in the two samples. Gu [37]
maintains }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {that
\uc1\u8220Xthe R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 {s could be different even though the
economic }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {relation
is entirely intact for each and every observation in}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {two samples\uc1\u8221X [37]. Gu\uc1\u8217Xs
[37] criticism applies to both the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {price regression and the return regression. He also
shows that }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
behaviour of explanatory power is even more compli-}\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {cated in a multivariate setting.
Explanatory power is then }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {affected by the variance-covariance matrix that
includes all }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{independent variables. Gu [37] recommends using residual}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {dispersion as an alternative measure of
{However, the residuals are subject to scaling and,
therefore, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {must be
adjusted for scale. According to Gu [37], several }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {possible adjustments exist. A relatively
easy scale adjust-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ment is to divide the estimated residual standard
deviation}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {by the
mean absolute fitted values of the dependent variable. }\par\pard\li613\ri0\sl-
\fs18\cf0\f0\charscalex100\b {3.3. Value Relevance and Market Efficiency }\b0
\par\pard\li893\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 {It should be noted
that value relevance research is related }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {to market efficiency research. When asking whether
account-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing
information is value relevant, one is also asking whether}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {stock investors use accounting numbers as
an input for}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{valuation. One does not ask, however, if the investors\uc1\u8217X use
of }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {accounting
information is }\fs20\cf0\f0\charscalex100\i {optimal}\i0
\fs20\cf0\f0\charscalex100 {. This constitutes CMBAR}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {on market efficiency, a subject that is not
covered in this }\par\pard\li613\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100
{paper [see 38 for an example of this kind of research].}{\super
\fs12\up3\cf0\f0\charscalex100 {10}}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Aboody, Hughes and Liu [39] do, however, combine in
their}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {study these
two lines of research, namely, value relevance }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {and market efficiency. They claim that even
though value }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevance researchers seem to implicitly draw the
conclusion }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {that the
stock market is efficient in the semi-strong form}{\super
{,}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {substantial
evidence suggests that the market may not be }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {completely efficient in its processing of public
information. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {The
purpose of their study is to analyse how possible market }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {inefficiencies may influence conclusions
drawn from value }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{relevance research.}\par\pard\li893\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100
{Aboody, Hughes and Liu [39] evaluate how market inef-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ficiency effects cause biases in inferences
drawn from tradi-}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{tional value relevance studies. They offer an adjustment }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {procedure that corrects for this bias and
adjusts for delayed}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{market reactions in the stock market. Specifically, they
mul-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tiply stock
prices with the ratio of one plus the actual stock }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {return to one plus the required rate of
stock return, both}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{measured in a future period }\fs20\cf0\f0\charscalex100 {. In their empirical
analysis, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{when }\fs20\cf0\f0\charscalex100 { is set to 12, 24 and 36 months, Aboody, Hughes
and}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Liu [39] find
that regression coefficients on both earnings }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {and book values of equity increase
significantly compared to}\par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {coefficients generated by the traditional method with
no }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {adjustment. This
is also the case when earnings are replaced }\par\pard\li613\ri0\sl-213\slmult0
{10}\fs16\cf0\f0\charscalex100 { Piotroski\uc1\u8217Xs [38] study suggests that it
is possible to earn abnormal returns }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {based on a simple strategy of investing in financially
strong high book-to-}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{market firms. }\par\pard\li613\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{11}\fs16\cf0\f0\charscalex100 { Semi-strong form efficiency implies that all
public information is calcu-}\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {lated into a stock\uc1\u8217Xs share
price. }\par\column\pard\li3680\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
\fs20\cf0\f0\charscalex100 {by residual income. The result holds for both level and
return }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {regressions,
while the magnitude of differences in coefficient}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {estimates is largest for return
regressions. For the level re-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {gressions, the differences are small in magnitude and
un-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {likely to be
significant in an economic sense. The adjustment }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {procedure of Aboody, Hughes
a}\fs20\cf0\f0\charscalex100 {nd Liu [39] has, however, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {not become standard in the value relevance
literature. Still, it }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{is sometimes applied to test the robustness of empirical
find-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ings [40,
41]. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100\b {4. THE VALUE RELEVANCE OF EARNINGS AND}\b0
\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100\b {OTHER FLOW
MEASURES }\b0 \par\pard\li0\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { The
majority of the value relevance literature is con-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {cerned with how accounting measures
influence the }\fs20\cf0\f0\charscalex100\i {change}\i0 \par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {in the market value of equity, i.e., the
stock return. The met-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ric of interest is generally bottom-line earnings. Section
4.1}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {describes some
general research on the value relevance of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {earnings and includes a brief review of the
groundbreaking}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{empirical research from the late 1960s. The coefficient de-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {scribing the relationship between earnings
and stock prices }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {is,
as outlined in section 3, referred to as the earnings re-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {sponse coefficient (ERC). Much research on
the determi-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {nants of
ERCs has been performed in the two last decades. A}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {review of this research is included in section 4.2.
Section 4.2}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {also shows
that value relevance is not necessarily constant }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {across all earnings levels. Several studies
suggest that the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{return-earnings association is non-linear. Section 4.3 docu-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ments that various earnings components may
have different }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {levels
of value relevance. In fact, a large amount of empirical}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {research finds that the valuation of
earnings differs across }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {earnings items. }\par\pard\li0\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100\b {4.1.
Earnings }\b0 \par\pard\li293\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100
{Section 4.1.1 briefly reviews the classical studies of Ball}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {and Brown [4] and Beaver [5]. Section 4.1.2
presents an }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {overview
of studies on the value relevance of bottom-line }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {earnings. The section discusses why the
association of stock}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{returns with aggregate earnings is often weaker than one }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {would expect based on a theoretical
perspective. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100\b \i
{4.1.1. The Breakthroughs }\b0 \i0 \par\pard\li293\ri0\sl-333\slmult0
\fs20\cf0\f0\charscalex100 {Ball and Brown\uc1\u8217Xs [4] article is often viewed
as the origin }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of
modern CMBAR. This paper is an event study in which}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Ball and Brown look at abnormal returns in
the months be-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {fore
and after earnings announcement dates. They conclude }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {that income is an informative number,
capturing half or more }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{of all the information about an individual company that be-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {comes available during a year. However, the
annual income }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {report
is not a very timely medium, since most of its content}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {(85%-90%) is captured before the earnings
announcement}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {date.}
{\super \fs12\up3\cf0\f0\charscalex100 {12}}\fs20\cf0\f0\charscalex100 { Ball and
Brown [4] report that earnings announce-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ments do not appear to cause any unusual jumps in
stock}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {prices. Still,
the study suggests a certain under-reaction in}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {stock price movements at the time of the
announcement. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {This
under-reaction creates a post-earnings announcement}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {drift that appears to be most pronounced in
cases of negative }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{income surprises. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
333\slmult0 \fs10\cf0\f0\charscalex100 {12}\fs16\cf0\f0\charscalex100 { The
immediate response of stock prices to earnings announcements is
a }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {research issue that
seems to never go out of fashion. For instance, Caylor, }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Lopez and Rees [42] study whether the value
relevance of earnings is condi-}\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {tional on the }\fs16\cf0\f0\charscalex100\i {timing}\i0
\fs16\cf0\f0\charscalex100 { of earnings information. }\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs16\cf0\f0\charscalex100\b \i {A Review of the Value Relevance Literature }\b0
\i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100 { The
conclusions of Ball and Brown [4] are supported in }\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {general by another foundational article in
CMBAR. Beaver }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[5]
concludes that the information content of income is sig-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {nificant. His evidence indicates a dramatic
increase in the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{trade volume of stocks during the week of earnings an-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {nouncements. In addition, the magnitude of
the stock price }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{changes during the week of announcements is much larger }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {than the average during the non-report
period. Both results }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{suggest that earnings announcements lead to a change in
the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {probability
distribution of future returns for investors, and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {hence, the earnings report has information
content. }\par\pard\li613\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100\b \i
{4.1.2. Some Important Results from More Recent Research }\b0 \i0
\par\pard\li613\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { The value
relevance of earnings is typically studied by }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {regressing the stock return on accounting
earnings (4) or the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{abnormal stock return on unexpected earnings (5). The ERC}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {measures the sensitivity of the stock price
to earnings. How-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ever, specifications (4) and (5) are not equivalent. The
first }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {specification
tests the general sensitivity of stock prices to }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the magnitude of reported earnings. The
second specification}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{focuses on the unexpected or unusual parts of stock price }\par\pard\li613\ri0\sl-
253\slmult0 \fs20\cf0\f0\charscalex100 {changes and earnings.}{\super
\fs12\up3\cf0\f0\charscalex100 {13}}\fs20\cf0\f0\charscalex100 { The latter
specification is inspired by }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {the CAPM framework; the empirical counterpart of
CAPM, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the market
model, is often used to estimate abnormal returns. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Since unexpected earnings are non-
observable variables in}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {financial markets, one must use proxies for this
figure. The }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {yearly
change in earnings is sometimes applied as a proxy}\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {for unexpected earnings. This is consistent
with earnings }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{following a random walk [21, 43, 44]. }\par\pard\li893\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {As shown in section 2, the theoretical background for
this }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {kind of
empirical research is the valuation models from fi-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {nance theory. The value of a company is
assumed to be the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{present value of future dividends or cash flows. If one
con-}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {ducts a level
regression using stock price changes as the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {dependent variable and earnings innovations as the
right-side }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{variable, one expects the ERC to equal 1+1/r if the
earnings }\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {change is
regarded as permanent and if one assumes that }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {there is a one-to-one relationship between
earnings innova-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{tions and net cash flow innovations. In this case, r is
the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {company cost of
capital. According to valuation theory, one }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {permanent extra dollar in earnings should increase the
value }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of the stock
by one dollar (that is, the effect of an extra dollar}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {this year) plus the present value of one
dollar in all future }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{years.}{\super \fs12\up3\cf0\f0\charscalex100 {14}}\fs20\cf0\f0\charscalex100
{ For instance, if the company cost of capital is 10%, }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the ERC should theoretically equal 11. If,
however, the earn-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ings innovation is regarded as transitory, an ERC of 1
would}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {be
expected. }\par\pard\li613\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { The
size of the ERC has been subject to extensive re-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {search. Some researchers claim that
earnings seem to be a }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {worse predictor of returns than one would expect. This
con-}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {clusion is
drawn from the low empirical estimates of the }\par\pard\li613\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {ERC and low R}{\super
\fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {s generated from
regressions of earnings on}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {stock returns [45]. Many explanations for this
phenomenon }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {have
been put forward in prior research. Although the list is }\par\pard\li613\ri0\sl-
{13}\fs16\cf0\f0\charscalex100 { One may argue that the concept of earnings
response coefficient only }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {should be used when raw stock returns and total
earnings are studied. Even }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {if the unexpected portion of either stock returns or
earnings is equal to zero, }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {there may still be a statistical association between
stock returns and earn-}\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {ings. As such, the stock price is earnings sensitive,
and the earnings re-}\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{sponse coefficient is larger than zero. }\par\pard\li613\ri0\sl-186\slmult0
\fs10\cf0\f0\charscalex100 {14}\fs16\cf0\f0\charscalex100 { ERCs can also be
compared with price-earnings ratios. }\par\column\pard\li1613\ri0\sl-253\slmult0
2 }\b0 \i0 { }\fs16\cf0\f0\charscalex100\b {13}\b0 \par\pard\li0\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100 {not exhaustive, these explanations include:
low earnings }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{persistence [21, 46], a lack of timeliness of earnings due
to}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {strict requirements
regarding objectivity and verifiability of}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {accounting numbers [28], conservative accounting [44,
47], }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {misspecification
of statistical models [20, 35, 48-50], inade-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {quately short measurement intervals for returns and
earnings }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {[51],
aggregation of earnings }\fs20\cf0\f0\charscalex100 {items [30, 52-55], and
earnings }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {management
[56, 57]. }\par\pard\li293\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {Poor
return-earnings associations and small ERCs due to }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {a lack of earnings persistence is a matter
investigated by }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Kormendi and Lipe [21]. They conclude that current earn-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ings innovations contain information about
future as well as }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{current equity benefits. However, in accordance with other}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {research, they do not find that stock
returns are excessively }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {sensitive to earnings innovations. A lack of
timeliness for}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{accounting numbers may also be an explanation for the low}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {return-earnings association. Timeliness can
be defined as the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{extent to which current period accounting income incorpo-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {rates current period economic income [58].
To provide }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {timely
information for equity investors is not the sole pur-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {pose of accounting figures. For instance,
most }\fs20\cf0\f0\charscalex100 {accounting}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {standards have strict requirements regarding the
objectivity}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {and
verifiability of accounting numbers. Collins, Kothari and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Shanken [28] show that such objectives may
reduce the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {timeliness
of earnings and hence reduce the association be-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tween earnings and stock
returns. }\par\pard\li293\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 {Easton,
Harris and Ohlson [51] investigate the effects of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {data aggregation on the return-earnings association.
They }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {hypothesise that
although a lack of timeliness may be the }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {case in the short-run, the correlation between returns
and }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {earnings will
increase if one looks at long-term data. Easton, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Harris and Ohlson [51] find that if return
intervals are ex-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{panded and earnings are aggregated over these longer time }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {intervals, the return-earnings association
improves dramati-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{cally. Hayn [49] states that the result of the accumulation
can }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {be attributed to
losses being almost absent as earnings are }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {aggregated over several years; see section
4.2. }\par\pard\li293\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 {The
misspecification of statistical models is suggested as }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {another one of the explanations for a poor
return-earnings }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{association. Beaver, McAnally and Stinson [50] claim that }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {low ERCs are due to earnings and prices
behaving as if they }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{were both endogenously determined. They use a simultane-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ous equations approach to mitigate this
bias and obtain sensi-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{tivity coefficients that are larger than those obtained
from }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {single equation
approaches. Liu and Thomas [25] also main-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {tain that low coefficients and disappointing
explanatory}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {power is a
matter of model specification. Liu and Thomas }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {[25] develop a multiple regression model in which
further}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {explanatory
variables are included in the analysis in order to}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {reflect information contained in forecast revisions and
dis-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {count rate
changes occurring during the year. Relative to}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {simple regression models, the multiple regressions
signifi-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cantly
improve explanatory power and increase the estimated }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ERCs. Easton and Harris [35] compare
earnings and change }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{in earnings as explanatory variables for stock returns.
They }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {first run single
regressions for the two measures and then use }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {both in a multivariate regression analysis. Each
variable is }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{significant in the single regressions. In their
multivariate }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{specification, the coefficient for earnings is significant in
all }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of the 19
analysed years, while the coefficient for the change }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {in earnings is significant in 8 of the 19
years. This result}\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
{\shp{\*\shpinst\shpleft6613\shptop13400\shpright11533\shpbottom13413\shpfhdr0\shpw
r3\shpwrk0\shpfblwtxt1\shplid2063\shpz1\shpbxpage\shpbypage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs20\cf0\f0\charscalex100 {suggests that both earnings levels and earnings changes
play }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {a role in
stock valuation. The Easton and Harris [35] frame-}\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {work has been extensively applied in recent
{research [59-61]. }\par\pard\li893\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100
{Marquardt and Wiedman [56] examine the effect of earn-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ings management on value relevance. While
the cash flow }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{component of earnings generally is regarded as the
objective }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {portion
of accounting earnings, the size of the accruals is to}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {an extent the result of subjective
judgements by accountants }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {and managers. Thus, accruals can be potentially
manipu-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {lated.
Marquardt and Wiedman [56] examine the value rele-}\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {vance of earnings for a sample of firms for
which there is }\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{reasonable}{ }\fs18\cf0\f0\charscalex100\i {ex ante}\i0 \fs18\cf0\f0\charscalex100
{ expectations as well as }\fs18\cf0\f0\charscalex100\i {ex post}\i0
\fs18\cf0\f0\charscalex100 { evidence }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {of earnings management. Specifically, they
investigate }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {whether
opportunistic earnings management impairs the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {value relevance of earnings for a sample of
firms issuing}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{secondary stock. Prior research has, according to
Marquardt}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {and
Wiedman [56], identified this as a situation in which}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {managers may have both the incentives and
opportunity to}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{manage earnings. This is particularly true when the
managers }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {themselves
participate in secondary equity issues by selling}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {shares of their own stock. Marquardt and
Wiedman\uc1\u8217Xs [56]}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {study supports their hypotheses. For the subset of
firms in}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {which
managers sell their stock through a secondary offering }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {(the MGMT-group), discretionary accruals
are significantly}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{positive in the year of the stock offering. In addition,
discre-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tionary
accruals are significantly more positive in the year of }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the offering for this group than for firms
with managers who}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{did not participate in a secondary offering. When
regressing }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {market
price on earnings, Marquadt and Wiedman [56] find}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {a significant decrease in the estimated
coefficient on net }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{income and a decrease in R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { during the year of the
stock}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {offering for
the MGMT-group. They interpret this as evi-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {dence of a decrease in the value relevance of net
income }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {when
earnings management is present.}{\super \fs12\up3\cf0\f0\charscalex100
{15}}\fs20\cf0\f0\charscalex100 { In general, the con-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {clusions of Marquadt and Wiedman [56] are
supported by}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Christensen, Hoyt and Paterson [57], who find that the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {greater are manager incentives for earnings
management, the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{less informative are earnings announcements to investors. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Note that incentives are important in this
kind of research; }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{the use of subjectivity in estimating accounting figures is
not}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {necessarily
negative as far as value relevance is concerned. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Discretionary accruals can help managers
produce a more }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{reliable and timelier measure of firm performance. In
fact, }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {this is known
as the performance measure hypothesis [62]. }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Ben-Hsien and Da-Hsien [63] report that income
smoothing}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {may
increase the value relevance of earnings. Earnings sta-}\par\pard\li613\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {bility can be seen as one property of high-
quality earnings.}{\super \fs12\up3\cf0\f0\charscalex100
{16}}\par\pard\li613\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100 { Some studies
investigate differences in the value rele-}\par\pard\li613\ri0\sl-253\slmult0
\fs20\cf0\f0\charscalex100 {vance of earnings across
countries.}\fs12\cf0\f0\charscalex100 {17,18}\fs20\cf0\f0\charscalex100 { For
instance, Ball, }\par\pard\li613\ri0\sl-213\slmult0
360\slmult0 \fs10\cf0\f0\charscalex100 {15}\fs16\cf0\f0\charscalex100 { Marquadt
and Wiedman [56] also find that book values play a greater
role }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {in equity
valuation when earnings management impairs the value
relevance }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {of net
income. }\par\pard\li613\ri0\sl-200\slmult0 \fs10\cf0\f0\charscalex100
{16}\fs16\cf0\f0\charscalex100 { Earnings quality can be evaluated along the
following earnings attributes }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[3]: accrual qua}\fs16\cf0\f0\charscalex100 {lity (the
degree to which earnings map closely onto cash }\par\pard\li613\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {flow), persistence, predictability,
smoothness, value relevance, timeliness, }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {and conservatism. }\par\pard\li613\ri0\sl-
200\slmult0 \fs10\cf0\f0\charscalex100 {17}\fs16\cf0\f0\charscalex100
{ International value relevance research does not necessarily have to
focus }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {on country-
specific results and comparisons across countries.
Osmundsen, }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {Asche,
Misund and Mohn [64] apply international data to investigate
the}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {value relevance
of accounting data for a specific industry, the oil
industry. }\par\column\pard\li3680\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100\b \i {Leif Atle Beisland }\b0 \i0 \par\pard\li0\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100 {Kothari and Robin [58] investigate the
value relevance of }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{earnings in seven countries and find that common-law ac-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {counting earnings exhibit significantly
greater timeliness }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{than code-law accounting earnings, but this is due entirely
to}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {greater sensitivity
to economic losses (that is, income con-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {servatism). They characterise code law as accounting
sys-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tems with high
political influence and common law as sys-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tems in which accounting practices are determined
primarily}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {in the
private sector. Using data from manufacturing firms in}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {16 countries, Ali and Lee-Seok [66]
investigate relations }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{between measures of value relevance and country-specific }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {characteristics.
They find that value relevance is lower in }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {bank-oriented financial systems, i.e., in countries in
which a }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {few banks
supply a substantial portion of the capital needs of }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {businesses as well as in countries in which
private sector }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {bodies
are not involved in the process of setting }\fs20\cf0\f0\charscalex100
{accounting}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {standards.
Ali and Lee-Seok [66] also document lower value }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {relevance in countries characterised by a
Continental ac-}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{counting model}{\super \fs12\up3\cf0\f0\charscalex100
{19}}\fs20\cf0\f0\charscalex100 { as opposed to a British-American
model}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {and in countries
in which tax rules influence }\fs20\cf0\f0\charscalex100
{accounting}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{measurement. Alternatively, value relevance appears to be }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {higher when more is spent on external
auditing services. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Mingyi [68] finds that a higher use of accrual }\fs20\cf0\f0\charscalex100
{accounting as }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{opposed to cash flow accounting negatively impacts value }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {relevance in countries with weak
shareholder protections, }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {whereas she finds no negative association between
accrual }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {accounting
and value relevance when shareholder protec-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tions are high. Brown, He and Teitel [69] document that
in}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {countries with
higher levels of accrual intensity, the value }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {relevance of earnings is positively associated with
conservatism. Barth, Landsman and Lang [70] present }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {evidence that use of International
Accounting Standards }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{(IAS) is associated with higher accounting quality. }\par\pard\li0\ri0\sl-
213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100\b
{4.2. Factors Influencing Earnings Response Coefficients }\b0 \par\pard\li0\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 { There are numerous papers describing the
relationship }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {between
earnings and stock returns. Still, it is impossible to}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {give a general answer as to how sensitive
stock returns are to}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{earnings or changes in earnings. This sensitivity, the ERC,
is }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {dependent upon
many factors. At the end of this section, }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {evidence will be presented that the ERC may in fact be
a }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {function of
the }\fs20\cf0\f0\charscalex100\i {level}\i0 \fs20\cf0\f0\charscalex100 { of
earnings. However, early studies that }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {analyse the determinants of ERCs typically disregard
possi-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ble non-
linearity in the return-earnings association. For in-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {stance, Collins and Kothari [43] study the
inter-temporal and}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{cross-sectional determinants of ERCs. They present evidence }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that ERCs are a function of riskless
interest rates (i.e., an }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {inter-temporal determinant) and the level of risk,
growth }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {and/or
persistence of earnings (i.e., cross-sectional determi-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {nants). Firm cost of capital increases with
the interest rate }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {and
the level of risk. Not surprisingly, Collins and Kothari }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {[43] find that the risk-free interest rate
and systematic risk }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{are negatively correlated with the ERCs. The ERCs, how-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ever, vary positively with growth prospects
and earnings }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
386\slmult0 \fs10\cf0\f0\charscalex100 {18}\fs16\cf0\f0\charscalex100 { Lara, Osma
and Noguer [65] document that international accounting }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {studies may be influenced by the choice of
database. They conclude that }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {differences between databases exist and lead to
differences in the results of }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {even simple empirical studies that use key accounting
variables. }\par\pard\li0\ri0\sl-200\slmult0 \fs10\cf0\f0\charscalex100
{19}\fs16\cf0\f0\charscalex100 { The Continental model is characterised by higher
statutory control, uni-}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{formity, conservatism, and uncertainty avoidance, while the
British-}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {American
model has higher professionalism, flexibility, and
transparency }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{[67]. }\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100 {persistence [20,
21].}{\super \fs12\up3\cf0\f0\charscalex100 {20}}\fs20\cf0\f0\charscalex100 { This
result is in accordance with their }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {hypothesis. It should be noted, however, that growth
and}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {persistence are
to a certain extent related. Collins and }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Kothari [43] can therefore not disregard that the
proxies used }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {for
these variables may reflect the effect of both variables. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Collins and Kothari [43] also demonstrate
that the return-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{earnings relation varies with firm size. They do,
however, }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {view size
as a proxy for differences in information environ-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ments. Once these differences are
controlled for, they find }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {little evidence that price changes co-vary with
earnings }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {changes
across firm size. The authors also emphasise that if }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {size is correlated with risk, growth and
persistence, this vari-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {able may erroneously turn up as a significant
explanatory}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {variable
for the ERCs. }\par\pard\li613\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100
{ Easton and Zmijevski [19] present evidence that is con-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {sistent with Collins and Kothari [43].
Their cross-sectional }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {study indicates that ERCs are positively associated
with}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {revision
coefficients and negatively associated with expected }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {rates of return. The revision coefficients
measure the extent }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{to which the information in earnings announcements
results }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {in
revisions in expected earnings and is a measure of earn-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ings persistence. Easton and Zmijevski [19]
also find a weak }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{but positive association between ERCs and firm size as
well}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {as a weak,
negative association between ERCs and system-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {atic risk. Moreover, Ahmed [22] document that ERCs can
be }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {related to
competition within the firms\uc1\u8217X product markets. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Biddle and Seow [72] perform cross-industry
comparisons of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ERCs. They claim that there are several advantages
related }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {to
estimating ERCs by industry. First, industry membership}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {naturally captures characteristic
attributes for different indus-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tries. Second, within-industry estimation allows
researchers }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {to
control for omitted variables that may differ considerably }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {by industry. Biddle and Seow\uc1\u8217Xs
[72] results confirm that }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ERCs differ substantially across industries. According
to}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {their study, the
differences are related to industry entry barri-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ers, product type, growth, financial leverage, and
operating}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {leverage.
The ERCs seem negatively related to financial and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {operating leverage and positively related
to industry entry}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{barriers, product durability and growth. }\par\pard\li893\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 {Teets and Wasley [73] point out that if the hypothesis
of }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {equality for
firm-specific ERCs is rejected, firm-specific }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {estimation should be used instead of pooled
estimation. This }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {is
also the case if there is correlation between firm-
specific }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {unexpected
earnings variances and ERCs. In their empirical }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {study, Teets and Wasley [73] find that the mean
firm-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {specific ERC
is 13 times larger than the corresponding coef-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ficient estimated using a pooled cross-
sectional regression. }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {The difference is due to }\fs20\cf0\f0\charscalex100\i
{both}\i0 \fs20\cf0\f0\charscalex100 { variation in coefficients
and }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {unexpected
earnings variances }\fs20\cf0\f0\charscalex100\i {and}\i0
\fs20\cf0\f0\charscalex100 { a negative relation be-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tween firm-specific unexpected earnings
variances and }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ERCs.
Teets and Wasley [73] conclude that using a pooled }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {estimation may lead to incorrect inferences
about the magni-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{tude of estimated coefficients and/or incorrect
inferences }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
{20}\fs16\cf0\f0\charscalex100 { Frank [71] shows that value relevance is also a
function of growth when }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {explanatory power (R}{\super
\fs10\up2\cf0\f0\charscalex100 {2}}\fs16\cf0\f0\charscalex100 {), rather than the
response coefficients, is used as the}\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {measure of value relevance. Her conclusion is that the
value relevance of }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{accounting data is significantly higher for low-growth firms relative to
high-}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {growth firms,
and she argues that the accounting data of high-growth
firms }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {seem to
capture fewer value-relevant events compared to the
accounting}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {data of
low-growth firms. }\par\column\pard\li1613\ri0\sl-253\slmult0
426\slmult0 \fs20\cf0\f0\charscalex100 {about differences in coefficient behaviour
between groups of}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{firms. }\par\pard\li293\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100 {ERCs may
also be incorrectly estimated if the functional}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {form of the return-earnings association differs from
what is }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {assumed in
the regression analyses. It has been common in}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {the value relevance literature to assume that this
relationship }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {is
linear. However, during the last couple of decades, a rela-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tively large number of studies document
that this is not nec-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{essarily the case [20, 44, 49]. These studies suggest that
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ERC is actually a
function of the earnings level. In other}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {words, the return-earnings association can be non-
linear. }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Non-linearity
is often assumed to be caused by differences in}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {earnings persistence, for instance, due to conservatism
or the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {presence
of an investor liquidation option. }\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { As mentioned before, accounting numbers might
lack }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {timeliness due
to requirements of objectivity and verifiabil-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ity. This strict demand for objectivity and
verifiability cre-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ates conservatism in accounting in general. Basu [44] inter-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {prets conservatism to result in earnings
that reflect bad news }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{more quickly than good news. This conservatism has conse-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {quences both for timeliness and the
persistence of earnings. }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Basu [44] predicts and finds that negative earnings
changes }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {are less
persistent than positive earnings changes. Consistent }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {with this asymmetric persistence, he finds
that ERCs are }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {higher
for positive earnings changes than for negative }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {changes [74].}{ }\fs20\cf0\f0\charscalex100
{As for timeliness, bad news earnings are time-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {lier than good news earnings, since accountants
typically}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {report the
capitalised value of bad news as losses. Hayn [49]}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {concludes that losses are less informative than
earnings. She }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{maintains that this is due to the liquidation option that
inves-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tors have.
Losses are not expected to perpetuate, and they are }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {perceived by investors as temporary.
Shareholders can al-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ways liquidate the firm rather than suffer from indefinite }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {losses. Darrough and Ye [75] highlight the
importance of }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{\uc1\u8220Xhidden assets\uc1\u8221X and intangibles for firms with losses.
They }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {show that
companies with a high level of intangible asset }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {intensity can sustain relatively long-term
losses and remain}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {in
business for many years. In the case of losses, Joos and}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Plesko [76] find that investors separately
value the R&D}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{component as an asset and the non-R&D component as if it}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {were a }\fs20\cf0\f0\charscalex100\i
{transitory}\i0 \fs20\cf0\f0\charscalex100 { loss. Dechow and Ge [46] show that
earn-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ings persistence
is affected by the sign and magnitude of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {accruals. Consistent with Hayn\uc1\u8217Xs [49]
finding, Dechow and }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Ge [49] report that the low earnings persistence of low ac-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cruals firms is primarily driven by special
items. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { In general,
the non-linear association between stock re-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {turns and earnings is not necessarily the exclusive
function}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of the sign
of earnings. Freeman and Tse [20] support the }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {idea of non-linearity and suggest a rather complex
relation-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ship between
changes in earnings and returns. Their model}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {rests on the assumption that the absolute value of
unexpected }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {earnings
is negatively correlated with earnings persistence. }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Specifically, they suggest an S-shaped
return-earnings rela-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{tion, that is, convex for bad news and concave for good}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {news. They obtain a substantially higher
explanatory power }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {for
their non-linear model than for the traditional linear }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {model. According to Elgers, Porter and
Emily Xu [59], this }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{non-linearity implies that a linear specification of the
return\uc1\u8211X}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{earnings relation imparts a downward bias to estimated earn-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ings response
coefficients. }\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs20\cf0\f0\charscalex100 {The non-linear relationship between returns and
earnings }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {is
generally attributed to varying earnings persistence. Note }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that the ability of earnings (and cash
flow) to forecast them-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {selves is a popular research subject within CMBAR.
Al-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {though market
values or market returns are not necessarily}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {studied in these papers, the papers can}
{ }\fs20\cf0\f0\charscalex100\i {indirectly}\i0 \fs20\cf0\f0\charscalex100 { be
regarded }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {as being
part of the value relevance literature. Since firm }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {value is the present value of future cash
flows or earnings, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{current cash flows and earnings should be regarded as
value }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {relevant if
they are able to predict future values of cash flows }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {and/or earnings. For example, Finger
[77] \uc1\u8220Xexamines the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {value relevance of earnings by testing their ability to
predict}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {two future
benefits of equity investment: earnings and cash }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {flow from operations.\uc1\u8221X Several
studies reviewed in this paper}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {are in fact studies of the time series properties of
accounting}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {numbers,
that is, studies that look at the predictive ability of }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cash flow and/or earnings [30, 46, 77-
79]. }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100\b {4.3. Disaggregation of Earnings }\b0
\par\pard\li613\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { The research
presented so far generally assumes that all }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {earnings components have identical associations with
stock}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {returns. A
large amount of research shows that this is not}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {necessarily the case. Section 4.3.1
discusses how value rele-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {vance may differ across earnings items. Section 4.3.2
inves-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tigates the
value relevance of earnings relative to that of cash }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {flow. Cash flow is a particularly
interesting component of }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {earnings. While the accrual component of earnings is a
func-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tion of both
accounting standards and the subjective judge-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ment of management and accountants, cash
flow is regarded }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {as
the objective component of earnings. Cash flows are also }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {input data in many valuation models.
Earnings can also be }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{disaggregated into a normal component and an abnormal, or }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {residual, component. The value relevance of
residual earn-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ings
is analysed in section 4.3.3. }\par\pard\li613\ri0\sl-306\slmult0
\fs18\cf0\f0\charscalex100\b \i {4.3.1. Detailed Earnings Items }\b0 \i0
\par\pard\li613\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { When analysing the
relationship of accounting earnings }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {with stock prices or stock returns, one normally looks
at net}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {earnings,
changes in net earnings or unexpected net earnings. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Some researchers have, however, used more
detailed data to }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{describe this relationship. Ramakrishnan and Thomas [53]}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {separate net income into permanent,
transitory and price-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{irrelevant components of unexpected earnings. Their
results }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {suggest
that different components of earnings have different }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {valuation implications. Several other
papers also suggest that }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {extraordinary and special items are less value relevant
than }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {other earnings
items [80, 81]. In response to the lacking}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {value relevance of some GAAP earnings items,
analysts }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {have
increasingly started to focus on \uc1\u8220Xstreet\uc1\u8221X earnings
num-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {bers [82].
Street earnings are pro-forma earnings numbers }\par\pard\li613\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {that typically exclude special items and
non-cash items.}{\super \fs12\up3\cf0\f0\charscalex100 {21}}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Using a UK sample, Choi, Lin, Walker and
Young [84] state }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{that non-GAAP earnings disclosures often conform precisely}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {to sustainable earnings proxies derived by
analysts and other }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{sophisticated financial statement users. In general, if
earnings }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {components
do not aggregate to a fully informative bottom-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {line number, then information from income
statement line }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
{21}\fs16\cf0\f0\charscalex100 { There is no common definition of street earnings.
In fact, Cornell and }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{Landsman [83] report that none of the pro-forma earnings measures
released }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {by
companies are specifically defined. }\par\column\pard\li3680\ri0\sl-253\slmult0
426\slmult0 \fs20\cf0\f0\charscalex100 {items can help improve the accuracy of
intrinsic value esti-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{mates [85]. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { Ohlson
and Penman [52] acknowledge that the different }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {line items of earnings may have different valuation
implica-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tions. They
run regressions using various components of }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {earnings as explanatory variables. These components
include }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {gross margin,
operating expenses, depreciation expenses, tax}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {expenses, other income or expense items, and
extraordinary}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {or
unusual line items. Ohlson and Penman [52] find that the }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {disaggregation of income data increases the
explanatory}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {power of
their regressions, and comparable results are re-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ported by Carnes [86]. They also find that
although the esti-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{mated coefficients of the various line items vary in the
short-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {run, they have
approximately the same magnitudes over}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {long-term return intervals of 10 years. They state that
their}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {empirical
evidence is remarkably consistent with the idea of }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {economic equivalence in line items. In the
short-run, how-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ever, the coefficients associated with the income
components }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that are
considered difficult to measure, particularly depre-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ciation and tax expenses, are lower than
the coefficients of }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{less problematic components. }\par\pard\li0\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 { Recent research has also disaggregated income data
into }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {foreign and
domestic income and investigated the value }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance of each measure. Thomas\uc1\u8217Xs [55]
empirical study }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{indicates that investors understate the persistence of
foreign}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {earnings. He
finds that foreign earnings have an unreasona-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {bly low ERC compared to domestic earnings. Contrary
to}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Thomas [55], Bodnar
and Weintrop [87] document that in-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {vestors place a higher weight on foreign earnings than
on }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {domestic earnings
when valuing companies. They explain }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {their result partly by the higher growth opportunities
in for-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {eign markets.
Hope and Kang [88] suggest that the results of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Bodnar and Weintrop [87] may be due to a
misspecification}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of
their model. When excluding what Hope and Kang [88]}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {call \uc1\u8220Xother
information,\uc1\u8221X the regression specification might }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {suffer from an omitted variables problem.
Note that \uc1\u8220Xother }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {information\uc1\u8221X is defined as relevant
information other than }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{current earnings in pricing securities. The bias from
exclud-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing
\uc1\u8220Xother information\uc1\u8221X has a greater effect on foreign
earn-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ings than on
domestic earnings, as foreign earnings are no }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {longer incrementally value relevant when controlling
for}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {\uc1\u8220Xother
information.\uc1\u8221X In a variance decomposition
analysis, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Callen,
Hope and Segal [89] document that domestic earn-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ings contribute significantly more to
unexpected stock price }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{variability}{ }\fs20\cf0\f0\charscalex100 {than do foreign
earnings. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100\b \i {4.3.2.
Earnings Versus Cash Flows }\b0 \i0 \par\pard\li0\ri0\sl-346\slmult0
\fs20\cf0\f0\charscalex100 { The majority of value relevance research focuses on
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value relevance
of earnings and the determinants of ERCs. }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {However, as the ultimate return of every investment is
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {cash flow
generated by the investment, the value relevance }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {of cash flows is often used as a benchmark
for assessing the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{usefulness of accounting values for stock investors. Accord-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ing to the FASB [see, for instance, FASB's
Objective of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Financial Reporting by Business Enterprises, 90], accounting}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {accruals cause earnings to become more
highly associated }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{with future cash flow and company value than does current}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cash flow. This FASB assertion is
frequently studied in value }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance research.}\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { Earnings equal cash flow plus accruals. Rayburn
[54]}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {investigates the
separate value relevance of cash flow and}\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100 {accruals. She
finds both variables to be associated with stock }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {returns. Still, her results indicate that
only cash flow and}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{changes in working capital have significant explanatory}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {power. The coefficients of both
depreciation and changes in}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {deferred taxes are insignificant. This result is
consistent with}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
notion that current accruals have information content, }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {while long-term accruals do not. Barth,
Cram and Nelson }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{[30] report that accruals items are both significantly
predic-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tive of
future cash flow and significantly related to stock}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {returns [see also 79, 91]. This conclusion
holds for both}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {long-
term and short-term accruals. Dechow [92] finds that }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {earnings are more strongly associated with
stock returns than }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{is realised cash flow. This conclusion is supported by }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Subramanyam and Venkatachalam [41], who
state that earn-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ings dominate operating cash flows as a summary indicator}\par\pard\li613\ri0\sl-
253\slmult0 \*\tx933\fs20\cf0\f0\charscalex100 {for}\tab
\fs20\cf0\f0\charscalex100\i {ex post}\i0 \fs20\cf0\f0\charscalex100 { intrinsic
equity value.}{\super \fs12\up3\cf0\f0\charscalex100
{22}}\fs20\cf0\f0\charscalex100 { Still, Dechow [92] also }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {finds that the capacity of realised cash
flows to measure firm }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {performance improves relative to earnings as the
measure-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ment
interval is increased, a finding consistent with Ray-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {burn\uc1\u8217Xs [54] results. Another
important conclusion from }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Dechow\uc1\u8217Xs [92] article is that earnings are
relatively more }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{associated with stock returns for firms experiencing
substan-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tial
changes in their working capital requirements and their}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {investment and financing activities. Under
such conditions, }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{realised cash flow is less able to reflect firm
performance }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {due to
severe timing and matching problems. The return-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {earnings association also increases with the length of
firm }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {operating
cycles. Basu [44] extends Dechow\uc1\u8217Xs [92] study by}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {showing that earnings are timelier than
cash flows in reflect-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ing bad news (see section 4.2). His results are
consistent with}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the
notion that conservatism is reflected in accruals rather }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {than in cash flow. The result also
indicates that accruals do }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {not improve the timeliness with which good news is
reported}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {in earnings
relative to cash flow. Bowen, Burgstahler and }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Daley [93] show that the persistence of
earnings relative to}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{cash flow is a matter of which cash flow measure is used;}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {there are several alternatives. Livnat and
Zarowin [94] pre-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{sent evidence that the disaggregation of financing and
oper-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ating cash
flows into their components significantly im-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {proves their degree of association with security
returns. }\par\pard\li613\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100 { In
general, when comparing the explanatory power of }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {different accounting measures, it is
important to distinguish }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {between incremental and relative information content.
This }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {distinction is
illustrated well in an article by Biddle, Seow }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {and Siegel [95], who offer the following
definition: }\par\pard\li1466\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100
{\uc1\u8220Xincremental comparisons ask whether one ac-}\par\pard\li1466\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {counting measure provides information
content }\par\pard\li1466\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {beyond
that provided by another, and apply }\par\pard\li1466\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {when one measure is viewed as given and an
as-}\par\pard\li1466\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {sessment is
desired regarding the incremental }\par\pard\li1466\ri0\sl-226\slmult0
\fs18\cf0\f0\charscalex100 {contribution of the other (e.g., a
supplemental }\par\pard\li1466\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{disclosure). Relative comparisons ask which }\par\pard\li1466\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {measure has greater information content,
and }\par\pard\li1466\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {apply when
making mutually exclusive choices }\par\pard\li1466\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {among alternatives, or when rankings by
infor-}\par\pard\li1466\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {mation
content is desired (e.g., when comparing }\par\pard\li1466\ri0\sl-226\slmult0
\fs18\cf0\f0\charscalex100 {alternative disclosures)\uc1\u8221X
[95]. }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
{22 }\fs16\cf0\f0\charscalex100 {Ex post intrinsic equity value is the discounted
value of dividends over a }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {three-year horizon plus the discounted market value at
the end of the fore-}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{cast horizon (i.e., the terminal value).}\par\column\pard\li1613\ri0\sl-
253\slmult0 \fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009,
Volume 2 }\b0 \i0 { }\fs16\cf0\f0\charscalex100\b {17}\b0 \par\pard\li293\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100 {Biddle, Seow and Siegel [95] perform an
empirical study }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {in
which the information content of net income, net sales and }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cash flow is compared. Incremental
information content tests }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {indicate that in pair-wise comparisons, each measure
pro-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {vides incremental
information content beyond each of the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {others. As for relative information content, their
results sug-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {gest that
net income provides significantly greater relative }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {information content than net sales and cash
flow, and net}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {sales
provide significantly greater relative information con-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tent than cash flow. Their results are
supported by Francis, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Schipper and Vincent [60], who find that earnings dominate }\par\pard\li0\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {EBITDA and CFO in explaining stock
returns.}{\super \fs12\up3\cf0\f0\charscalex100 {23}}\fs20\cf0\f0\charscalex100
{ Xu and Cai}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[97] find
that sales revenue outperformed earnings and cash }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {flow for high-tech companies in the 1990s [98, 99].
Kim, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Lim and Park
[100] report that an earnings change that is }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {supported by sales is generally valued}
{ }\fs20\cf0\f0\charscalex100 {by the market as more }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {important than an earnings change due to
other means. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Callen
and Segal [101] perform a variance decomposition}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {analysis to test the value relevance of
cash flow and accruals. }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Accrual earnings news and cash flow earnings news
are }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {found to drive
firm-level stock returns equally. }\par\pard\li293\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {In a much-cited study, Sloan [32] investigates the
persis-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tence of the
cash flow and the accrual components of earn-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ings. His results indicate that earnings performance
attribut-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {able to the
accrual component of earnings exhibits lower}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {persistence than earnings performance attributable to
the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cash flow
component of earnings. In fact, Konan Chan, Ja-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {gadeesh and Sougiannis [102] report that aggregate
future }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {earnings
decrease by $0.046 and $0.096 in the next one and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {three years, respectively, for a $1
increase in current accru-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {als. Sloan [32] claims that this fact is not adequately
appreci-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ated by the
average investor [compare 103, 104]. His study}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {suggests that investors fail to distinguish fully
between the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {different
properties of the accrual and cash flow components }\par\pard\li0\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {of earnings.}{\super
\fs12\up3\cf0\f0\charscalex100 {24}}\fs20\cf0\f0\charscalex100 { As a result, firms
with relatively high levels of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {accruals experience negative future
a}\fs20\cf0\f0\charscalex100 {bnormal stock returns. }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {The opposite is true for firms with low
accruals levels. Lev}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{and Nissim [106] show that the so-called accrual anomaly}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {documented by Sloan [32] still exists and
that its magnitude }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{has not decreased over time. Institutions shy away from }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {firms with extreme accruals, because their
attributes, such as }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{small size, low profitability, and high risk, stand in stark}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {contrast to those preferred by most
institutions. Individual}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {investors are generally unable to profit from trading
on ac-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cruals
information due to the high information and transac-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tion costs associated with implementing a
consistently prof-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{itable accruals strategy. When using country-level data, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Pincus, Rajgopal and Venkatachal [107]
report that this }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{anomaly is more likely to occur in countries having a com-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {mon law tradition than in countries with a
code law tradition. }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{The accrual anomaly is also more likely to occur in
countries }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {that allow
the extensive use of accrual accounting as well as }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {in countries having a relatively low
concentration of share }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ownership. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
{23}\fs16\cf0\f0\charscalex100 { In a study on mu}\fs16\cf0\f0\charscalex100
{ltiples-based equity valuation, Liu, Nissim and Thomas }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[96] find that earnings multiples generally
outperform operating cash flow }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {multiples. }\par\pard\li0\ri0\sl-200\slmult0
\fs10\cf0\f0\charscalex100 {24}\fs16\cf0\f0\charscalex100 { In an earlier study,
Wilson [105] presents evidence that for a given }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {amount of earnings, the stock market reacts
more favourably to earnings }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {with larger cash flow
components. }\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs20\cf0\f0\charscalex100 { This section cannot be complete without quoting
some }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {important
results from Hribar and Collins [108]. As has }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {already been noted, the difference between
cash flow and}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{earnings is accruals. Accruals can be measured either as
the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {change in
balance sheet accounts or directly from the cash }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {flow statement. Hribar and Collins [108]
find that studies }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{using a balance sheet approach are potentially
contaminated }\par\pard\li613\ri0\sl-253\slmult0 \fs18\cf0\f0\charscalex100 {by
measurement errors in accruals estimates.}{\super \fs10\up3\cf0\f0\charscalex100
{25}}\fs18\cf0\f0\charscalex100 { Accurate }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {accruals data have been available from cash flow
statements }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {in the
U.S. since 1988. Still, according to Hribar and Collins }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {[108], some of the more recent CMBAR
studies have chosen }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{to use the indirect balance sheet approach. This choice
of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {method may have
affected the conclusions of some studies }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {regarding the difference in value relevance between
cash }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {flow and
earnings. }\par\pard\li613\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100\b \i
{4.3.3. Residual Income }\b0 \i0 \par\pard\li613\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 { The works of Ohlson [11] and Feltham and Ohlson
[9] }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {triggered a
vast amount of empirical research on the residual}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {income model (see section 2). Since
residual income cannot}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {be observed either in the financial markets or in
financial}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {reports,
it must be estimated by researchers. Using different }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {estimates for residual income, several
studies conclude that }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {their measure is a value relevant number [39, 109-111].
}\par\pard\li893\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 {Economic value
added (EVA) is a concept closely related }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {to residual income. EVA is Stern Steward &
Co.\uc1\u8217Xs trade-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {marked variant of residual income. The basic ideas are
the }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {same as in the
residual income model, but Stern Steward & }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Co. makes certain adjustments to accounting income
and}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {accounting
equity before computing company value. Biddle, }\par\pard\li613\ri0\sl-
253\slmult0 \fs20\cf0\f0\charscalex100 {Bowen and Wallace [111]}{\super
\fs12\up3\cf0\f0\charscalex100 {26}}\fs20\cf0\f0\charscalex100 { compare the value
relevance of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{earnings to that of residual income and EVA. Their
relative }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{information content tests reveal earnings to be more
highly}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {associated
with returns than EVA and residual income. In }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {addition, tests for incremental information
content suggest }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{that the EVA and residual income components add only}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {marginally beyond earnings to information
content. Biddle, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Bowen and Wallace [111] conclude that there is little evi-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {dence to support the claim that EVA and
residual income are }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{superior measures to earnings in their association with
stock}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {returns or
firm value. Note that Biddle, Bowen and Wallace }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {[111] use current realisations, not future flows, for
each }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {performance
measure. This can be one explanation for the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {seemingly poor value relevance of EVA and residual
earn-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ings:
\uc1\u8220Xequity valuation is ultimately the discounted
present}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value of
future equity cash flow (or dividends or residual}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {income or EVA)\uc1\u8221X
[111]. }\par\pard\li613\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 { The
conclusions of Biddle, Bowen and Wallace are in }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {general supported by Chen and Dodd [109]. They
compare }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the value
relevance of operating income, residual income and }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {EVA. They conclude that operating income
regressions tend }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {to
show higher R}{\super \fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100
{s than residual income regressions, which}\par\pard\li613\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {in turn have higher R}{\super
\fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 {s than EVA
regressions. Chen and }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Dodd [109] do, however, find that residual income
measures }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {contain
significant incremental information that is not avail-}\par\pard\li613\ri0\sl-
{25}\fs16\cf0\f0\charscalex100 { The difference between the two methods is due to
the fact that a portion of }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {the changes in balance sheet working capital accounts
relates to non-}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{operating events, such as mergers and acquisitions, divestitures and
foreign }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {currency
translations. }\par\pard\li613\ri0\sl-186\slmult0 \fs10\cf0\f0\charscalex100
{26}\fs16\cf0\f0\charscalex100 { Note that Biddle, Bowen and Wallace [111] provide
a thorough descrip-}\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{tion of the EVA model. }\par\column\pard\li3680\ri0\sl-253\slmult0
426\slmult0 \fs20\cf0\f0\charscalex100 {able in operating income measures. In a
study using Greek}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{data, Kyriazis and Anastassis [112] find that net and
operat-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing income
appear to be more value relevant than EVA. }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Equivalent findings are reported by Tsuji [113] in a
study}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {using Japanese
data. Bettman [114] uses an Australian sam-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ple to investigate the inclusion of technical factors
in the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Ohlson [11]
model. She documents that the inclusion of }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {both fundamental and technical factors within the
valuation}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {framework
yields a model of greater explanatory power in}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {comparison to models that only consider fundamental
or }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {technical measures
in isolation. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100\b {5. THE VALUE RELEVANCE OF EQUITY
AND}\b0 \par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100\b {OTHER STOCK
MEASURES}\b0 \par\pard\li0\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 { This
section reviews research on the value relevance of }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {balance sheet measures. While much of the
{literature primarily focuses on flow measures, a large num-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ber of studies also show that the value
relevance of stock}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{measures. However, some of the balance sheet studies are }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {rather specialised. Section 5.1 reviews
some of the more }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{general studies on the value relevance of balance sheet}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {measures. Examples of the specialised
research are presented }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{in section 5.2. }\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100\b {5.1. General Value Relevance Research on
Balance Sheet }\b0 \par\pard\li0\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100\b
{Measures }\b0 \par\pard\li0\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 { A
vast amount of research papers document that book}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {values of equity are highly associated with
stock prices [52, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {74,
110, 115-117]. The statistical association between stock}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {prices and book equity is typically
stronger than the associa-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tion between stock returns and earnings. However, the
value }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {relevance of
balance sheet measures is sensitive to the valua-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tion principles applied to the various
asset and debt compo-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{nents. Some empirical studies of balance sheet items com-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {pare the value relevance of historical cost
estimates with that }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{of fair value estimates. Several conclude that fair value
esti-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {mates are more
value relevant [118-120]. However, Khurana }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {and Kim [119] also find that for small bank holding
compa-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {nies and
companies with no analysts following, historical }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {cost measures of loans and deposits are
more informative }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {than
fair values. They conclude that their findings are consis-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tent with the notion that fair value is
generally less value-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{relevant when objective market-determined fair value meas-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ures are not available. Note that while
fair value accounting }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{may increase the value relevance of balance sheet measures, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the value relevance of earnings might
actually be depressed}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{compared to historical cost estimates. This feature is
attrib-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {uted to a
higher portion of unexpected earnings under fair}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {value accounting, including, for instance,
transitory gains }\par\pard\li0\ri0\sl-253\slmult0 \fs20\cf0\f0\charscalex100 {and
losses [40].}{\super \fs12\up3\cf0\f0\charscalex100 {27}}\fs20\cf0\f0\charscalex100
{ In a British study, Danbolt and Rees [122] }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {conclude there is no obvious advantage to adopting fair
value }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {income
accounting if fair value balance sheet values are avail-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {able to the
user.}\fs12\cf0\f0\charscalex100 {28}\par\pard\li0\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 { Barth, Beaver and Landsman [116] study how
the balance sheet is related to financial health. }\par\pard\li0\ri0\sl-213\slmult0
\fs10\cf0\f0\charscalex100 {27}\fs16\cf0\f0\charscalex100 { Some analysts actually
claim that fair value accounting is to some extent }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {to blame for the current financial crisis
[121]. }\par\pard\li0\ri0\sl-200\slmult0 \fs10\cf0\f0\charscalex100
{28}\fs16\cf0\f0\charscalex100 { Using a sample of UK life insurers, Horton [123]
finds that supplementary }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {information regarding what she refers to as
\uc1\u8220Xrealistic reporting\uc1\u8221X (i.e., fair }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {value) appears to be value-
relevant. }\par\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsx
n133\margtsxn666\margbsxn240\cols2\colno1\colw5946\colsr-
0\colno2\colw5493\pard\li613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i {A
Review of the Value Relevance Literature }\b0 \i0 \par\pard\li613\ri0\sl-
426\slmult0 \fs20\cf0\f0\charscalex100 {They find that the sensitivity of the
equity book value to the }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {equity market value increases as financial health
decreases. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {The
opposite is true for earnings; the incremental explana-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tory power of earnings is positively
related to financial}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{health. This means that as a firm\uc1\u8217Xs financial health
deterio-}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {rates, the
book value of equity becomes a relatively more }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {important explanatory variable for stock
prices than earn-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ings. Barth, Beaver and Landsman [116] claim that the bal-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ance sheet\uc1\u8217Xs distinctive role is
to provide information on }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {liquidation values to facilitate loan decisions and
monitor}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {debt
contracts. Liquidation values obviously become more }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {relevant as the probability of default
increases. Hence, it is }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {not surprising that the balance sheet is more value
relevant }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {for
distressed companies. The value relevance of book equity }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {is also a function of differences relating
to accounting meas-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{urement of intangible assets. One would expect that a
high }\par\column\pard\li1613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
{The Open Business Journal, 2009, Volume 2 }\b0 \i0
{ }\fs16\cf0\f0\charscalex100\b {19}\b0 \par\pard\li0\ri0\sl-426\slmult0
\fs18\cf0\f0\charscalex100\b {5.2. Examples of Specialised Research }\b0
\par\pard\li0\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { A substantial
portion of value relevance research is fo-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {cused on earnings, cash flow and the coefficients of
these }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {flow measures.
Research is often on a wide selection of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {firms, and it is common to pool data of different
industries, }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {company
sizes, accounting standards, and so on into one }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {large sample. As mentioned in the last
section, much re-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{search on balance sheet measures is rather specialised.
Some }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {studies, for
example, are from different industries. For in-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {stance, Petroni and Whalen [126] investigate
property-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {liability
insurers, Harris and Ohlson [127] study the oil and}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {gas sector, and Barth [128] analyses banks.
It is also popular }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {to
look at the value relevance of different accounting meth-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ods, including}\par\pard\li0\ri0\sl-
333\slmult0 \*\tx573\fs20\cf0\f1\charscalex100 {\uc1\u61623X}\tab
\fs20\cf0\f0\charscalex100 {Purchase versus pooling accounting [129,
130]. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133
\cols3\colno1\colw5946\colsr-0\colno2\colw573\colsr-
0\colno3\colw4920\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {level
of unrecognised intangible assets might lead to net}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100
{income having a relatively higher explanatory power than }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {equity book value and vice versa. Barth,
Beaver and Lands-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{man\uc1\u8217Xs [116] study confirms this hypothesis. Overall,
Barth, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Beaver and
Landsman [116] conclude that their study pro-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {vides support for the contention that the balance sheet
and}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {income statement
fulfil different roles. In addition, their}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {analysis shows that both equity book value and net
income }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {are priced.
Barth, Beaver and Landsman [116] maintain that }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {omitting one or the other potentially leads
to model mis-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{specification. Their conclusion is supported by Dechow, }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Hutton and Sloan [110], who also find that
book values of }\par\column\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f1\charscalex100
{\uc1\u61623X}\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f1\charscalex100
{\uc1\u61623X}\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
320\slmult0 \fs20\cf0\f1\charscalex100 {\uc1\u61623X}\par\pard\li0\ri0\sl-
333\slmult0 \fs20\cf0\f1\charscalex100 {\uc1\u61623X}\par\pard\li0\ri0\sl-
306\slmult0 \fs20\cf0\f1\charscalex100 {\uc1\u61623X}\par\column\pard\li0\ri0\sl-
293\slmult0 \fs20\cf0\f0\charscalex100 {The equity method
[131]. }\par\pard\li0\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 {Revaluation
[132]. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {Deferred tax
liability [115, 133, 134]. }\par\pard\li0\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 {Capitalisation versus expensing of research and
de-}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {velopment costs
[135, 136]. }\par\pard\li0\ri0\sl-306\slmult0 \fs20\cf0\f0\charscalex100 {Value
relevance of asset write-downs [137, 138]. }\par\pard\li0\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {Pension accounting [40, 139]. }\par\pard\li0\ri0\sl-
320\slmult0 \fs20\cf0\f0\charscalex100 {LIFO inventory accounting
[140]. }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn13
3\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {equity convey additional information over earnings in
ex-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {plaining
contemporaneous stock prices. Ayers [115] finds }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {that firm assets and liabilities in general are value-
relevant. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {In
addition, he documents that net pension liability and other}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {post-retirement liability amounts are
significantly associated }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {with the market value of equity. In Korea, Bae and
Jeong }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[124] find
that the value relevance of book value is signifi-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {cantly smaller if a firm\uc1\u8217Xs
controlling power is heavily con-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {centrated in an individual or a single family. Bae and
Jeoung}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {[124] also
report that cross-equity ownership negatively}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {affects value relevance, while foreign equity ownership
posi-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tively affects
{ Ohlson and Penman [52] study the value relevance of }\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {disaggregated balance sheet data. They
conclude that the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{disaggregation of book value into balance sheet
components }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {does not
improve their model\uc1\u8217Xs explanatory power. Note
that }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {this result is
in sharp contrast to the disaggregation of in-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {come data explained in section 4.3.1. Lev
and Thiagarajan}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{[125] identify a set of financial variables (or
fundamentals) }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that
are claimed by analysts to be useful in security valua-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tion, and they examine these claims by
estimating the incre-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{mental value relevance of these variables over earnings. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Some of the variables are balance sheet
items, and Lev and }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Thiagarajan [125] present empirical evidence that
dispropor-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tionate
increases in inventories and account receivables are }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {negatively related to stock prices. Lev and
Thiagarajan [125]}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{argue that such increases can be seen as a negative signal
to}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {stock investors,
since the increases suggest difficulties in}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {selling a firm\uc1\u8217Xs products. Note also that the
degree of con-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{servatism in accounting in general affects the value rele-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {vance of balance sheet figures
[47]. }\par\column\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 { Some
of these articles are reviewed in section 7, which }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {looks at the value relevance of different
accounting stan-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{dards. Note that the different methods for valuing balance }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {sheet items also affect the income
statement. }\par\pard\li0\ri0\sl-266\slmult0 \fs20\cf0\f0\charscalex100 { It is
quite common to measure the combined value rele-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {vance of flow measures, for instance
earnings, and balance }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{sheet measures, for instance book value of equity; see
speci-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {fication (3).
Barth, Beaver and Landsman [116] provide an }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {excellent example of such a study. The next section
demon-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {strates that
this methodology can also be used in other set-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tings. }\par\pard\li0\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100\b {6. VALUE
RELEVANCE OVER TIME }\b0 \par\pard\li0\ri0\sl-333\slmult0
\fs20\cf0\f0\charscalex100 { During the last decades, most of the Western world
has }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {experienced a
shift from industrialised economies to high-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tech, service-oriented economies. The rate of change in
these }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {economies is
higher than ever before. How are these changes }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {affecting the value relevance of historical cost-based
finan-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cial
statements? This is a question that has been analysed by }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {several researchers in recent
years. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { Collins,
Maydew and Weiss [74] investigate the value }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance of earnings and book values of equity over
time }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {using the
valuation framework provided by Ohlson [11]; see }\par\pard\li0\ri0\sl-
253\slmult0 \fs20\cf0\f0\charscalex100 {regression specification (3). R}{\super
\fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 { is used as the
primary metric }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {of
value relevance. The explanatory power of earnings and}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {book values are decomposed into three
elements: (1) the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{incremental explanatory power of earnings, (2) the incre-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {mental explanatory power of book values,
and (3) the ex-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{planatory power
common to both earnings and book values. }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Collins, Maydew and Weiss [74] conclude that while the
}\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\pard\
sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\fs20\cf0\f0\charscalex100 {incremental value relevance of earnings has declined
over}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the last 40
years, it has been replaced by an increased value }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {relevance of book values. Overall, they
conclude that the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{combined value relevance of earnings and book values has }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {increased slightly in this period. This
conclusion contrasts }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{the seemingly popular view that the changes over the last }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {decades must have made
acc}\fs20\cf0\f0\charscalex100 {ounting measures }\fs20\cf0\f0\charscalex100\i
{less}\i0 \fs20\cf0\f0\charscalex100 { relevant. }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Collins, Maydew and Weiss [74] explain the
shift in value }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevance from earnings to book values by citing the
increas-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ing
frequency and magnitude of one-time items, the increas-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ing frequency of negative earnings, and
changes in average }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{firm size and the intensity of intangibles across time. }\par\pard\li613\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 { Francis and Schipper [15] report similar
conclusions }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {when
using tests equivalent to the ones employed by Collins, }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Maydew and Weiss [74]. In contrast, Brown,
Kin and Lys }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {[36]
find that value relevance as measured by R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { declines }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {significantly when controlling for scale effects (see
section }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {3.2.2).
They also present evidence that the increased R}{\super
{ re-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ported in
Collins, Maydew and Weiss [74] and Francis and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Schipper [15] is largely attributable to
the fact that the in-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{crease in scale effect has more than offset the decrease
in }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {explanatory
power in the underlying relations. Francis and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Schipper [15] do, however, perform one
additional test that }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{is fundamentally different. They use the total return
that }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {could be
earned from foreknowledge of financial statement}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {information as a measure of value relevance. Contrary
to}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tests on
explanatory power, this test controls both for scale }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {increases and changes in the volatility of
market returns over}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{time. Francis and Schipper [15] point out that if the
absolute }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {amount of
value relevant information in financial statements }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {is constant over time, but the volatility
of market returns is }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{increasing for reasons that cannot be traced to
information}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {sources,
the explanatory power tests will be biased towards }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the result that value relevance is
decreasing over time. In }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {fact, their study does suggest that the variability of
market }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {returns has
been increasing over the sample period. Francis }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {and Schipper [15] find that returns to perfect
foresight trad-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing
strategies based on accounting earnings and book value }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {of equity have decreased over their sample
period. However, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{returns based on cash flow strategies have not changed
sig-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {nificantly over
time. Their overall conclusion is that their}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {study provides mixed evidence as to whether value
relevance }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {has
changed over the last decades. It should also be noted }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that Francis and Schipper [15] do not find
support for the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{common belief that high-technology firms have experienced }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {a greater decline in value relevance than
low-technology}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{firms. }\par\pard\li613\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { The
ambiguity of results within this line of research is }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {apparent when looking at a study by Lev and
Zarowin [141]. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {This
study suggests that the value relevance of reported}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {earnings, cash flow and book equity has
deteriorated over the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {past 20 years. The decrease is less pronounced for cash
flow }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {than for
earnings. Lev and Zarowin [141] maintain that the }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {deterioration in value relevance of
accounting numbers is }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {due to }\fs20\cf0\f0\charscalex100\i {change}\i0
\fs20\cf0\f0\charscalex100 {. They document that the rate of change
expe-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {rienced by
U.S. companies has increased during the two last }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {decades. It is argued that the increasing
rate of change dis-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{torts the fundamental accounting measurement process of }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {periodically matching costs with revenues.
Specifically, Lev}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{and Zarowin [141] state that it is in }\fs20\cf0\f0\charscalex100 {accounting for
intangi-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {bles that
the present system most seriously fails to reflect }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {enterprise value and performance. For
instance, restructuring}\par\column\pard\li3680\ri0\sl-253\slmult0
426\slmult0 \fs20\cf0\f0\charscalex100 {costs and R&D expenditures are immediately
expensed, }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {while the
benefits from these intangibles are recorded later. }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {They claim that the capitalisation of
intangible assets should}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {improve the value relevance of financial information.
This }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {conclusion is
supported by Aboody and Lev [136]. Jorion, }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Shi and Zhang [142] also find that accounting
information}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {has lost
value relevance over time. They partly attribute their }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {findings to increased earnings management
(see section}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {4.1.).
Ely and Waymire [143] find little evidence that earn-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ings relevance is higher following (1) the
empowerment of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
Committee on Accounting Procedure (CAP) as the first}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {U.S. accounting standard-setting body in
1939 and (2) sub-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{sequent reorganisations of the standard-setting process
lead-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {ing to the creation of the Accounting Principles Board
(APB)}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {in 1959 and the
Financial Accounting Standards Board}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {(FASB) in 1973.}\par\pard\li0\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 { Francis and Schipper\uc1\u8217Xs [15] claim that
increased volatil-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ity
of market returns might result in statistical analyses that }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {show a decrease in value relevance when
this is not in fact }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{the case is further investigated by Dontoh, Radakrishnan and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Ronen [117]. Dontoh, Radakrishnan and Ronen
[117] basi-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {cally
confirm Francis and Schipper\uc1\u8217Xs [15] claim, showing}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that when non-information-based trading
activities increase, }\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{R}{\super \fs12\up3\cf0\f0\charscalex100 {2}}\fs20\cf0\f0\charscalex100 { from a
regression of stock prices on accounting informa-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tion declines. This is explained by the
injection of noise into}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{stock prices due to non-information-based trading. Dontoh, }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Radakrishnan and Ronen [117] document that
reported de-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {creases
in the association between stock prices and account-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ing information may be due, at least
partly, to increased non-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {information-based trading activities. Interestingly,
they find }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that this
effect is particularly strong for highly intangible-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {intensive firms. According to Dontoh,
Radakrishnan and}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {Ronen
[117], this result suggests that a possible decrease in}\par\pard\li0\ri0\sl-
240\slmult0 \fs20\cf0\f0\charscalex100 {R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { for such firms is to a large extent attributable
to non-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {information-
based trading rather than to the inadequacy of }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {accounting information. }\par\pard\li0\ri0\sl-
320\slmult0 \fs20\cf0\f0\charscalex100 { In Australia, Brimble and Hodgson [144]}{
}\fs20\cf3\f0\charscalex100 {conclude that }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf3\f0\charscalex100 {the value relevance of core accounting earnings has not
sig-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf3\f0\charscalex100 {nificantly
declined over time; comparable results are also }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf3\f0\charscalex100 {reported for Denmark [145]. Their empirical
study controls }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf3\f0\charscalex100 {for
transitory items using non-linear regressions and adjusts }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf3\f0\charscalex100 {for possible stock market inefficiencies
[39].}{\super \fs12\up3\cf3\f0\charscalex100 { 29}}\fs20\cf3\f0\charscalex100
{ They state}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf3\f0\charscalex100 {that the
nature of the relationship between earnings and stock}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf3\f0\charscalex100 {prices has changed such that a linear model
does not fully }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf3\f0\charscalex100
{abstract the association, and so researchers must utilise
non-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf3\f0\charscalex100 {linear models and
adjust for potential market inefficiencies in }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf3\f0\charscalex100 {their research design. }\fs20\cf0\f0\charscalex100
{Brimble and Hodgson [144]}{ }\fs20\cf3\f0\charscalex100 {also
find }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf3\f0\charscalex100 {that book values
do not have as high of an association with }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf3\f0\charscalex100 {stock prices as do earnings. In fact, the relation
between }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf3\f0\charscalex100 {book values
and stock prices is lower than in comparable }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf3\f0\charscalex100 {studies that use U.S. data.}\fs20\cf0\f0\charscalex100
{ Hellstr�m [147] investigates the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {value relevance of accounting information in a
transition}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {economy.
Her analyses are conducted on a sample from the }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Czech Republic from 1994-2001. She states
that the objec-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tive
of the study is to investigate the validity of the value }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {relevance methodology by finding
an }\fs20\cf0\f0\charscalex100 {accounting setting in}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {which the results of value relevance tests
might be predicted}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{unambiguously; she argues that a transition economy such as }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the Czech Republic provides such an
institutional and ac-}\par\pard\li0\ri0\sl-213\slmult0
{29}\fs16\cf0\f0\charscalex100 { Balkrishna, Coulton and Taylor [146] report that
incidence of loss in }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{Australia is particularly
frequent.}\par\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn
133\margtsxn666\margbsxn226\cols2\colno1\colw5946\colsr-
426\slmult0 \fs20\cf0\f0\charscalex100 {counting setting. She finds that value
relevance is lower in a }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {transitional economy than in a well-developed market
econ-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {omy using
Sweden as a benchmark, but value relevance }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {increases over time as a result of transition progress.
Hell-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {str�m [147]
concludes that as the results of the study confirm }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {the predicted results, they thus provide
evidence supporting}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{the validity of the value relevance methodology. }\par\pard\li893\ri0\sl-
333\slmult0 \fs20\cf0\f0\charscalex100 {This paper focuses mainly on what can be
termed direct }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value
relevance research, i.e., how accounting variables are }\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100 {associated with stock prices and stock
returns. However, }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{CMBAR studies have also devoted considerable attention on}\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {the ability of accounting measures to
forecast future firm }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{performance, as measured by future earnings or cash flow }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {(see section 4.2). Since today\uc1\u8217Xs
stock price is the present}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {value of future cash flow or earnings, this line of
research }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {can be
understood indirectly as value relevance research. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Kim and Kross [148] use the methodology of
Collins, May-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {dew
and Weiss [74] to study how the ability of earnings to}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {predict future cash flow has developed over
time. They find }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{that the relationship between current earnings and future }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {operating cash flow has increased over
time. Still, the same }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {sample reports a decreasing contemporaneous
association}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {between
stock prices and earnings. One possible explanation}\par\pard\li613\ri0\sl-
226\slmult0 \fs18\cf0\f0\charscalex100 {for this seemingly paradoxical finding is
that the authors }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{analyse cash flow only one year ahead, while stock prices }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {undoubtedly are a function of all future
company cash flows. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Note also that their finding is consistent with market
ineffi-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ciency
explanations. Nevertheless, Kim and Kross [148]}\par\pard\li613\ri0\sl-
213\slmult0 \fs18\cf0\f0\charscalex100
{conclude that they are unable to reconcile the
increasing }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ability
of current earnings to predict future cash flow with}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the decreasing ability of current earnings
and cash flow to }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{explain prices. }\par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100\b {7. THE
VALUE RELEVANCE OF ALTERNATIVE }\b0 \par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100\b {ACCOUNTING METHODS}\b0 \par\pard\li613\ri0\sl-
346\slmult0 \fs20\cf0\f0\charscalex100 { Different accounting standards in general
have different }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{informational value for stock investors. One possible ac-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {counting standard may produce significantly
more timely}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{accounting measures than another competing standard. In-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {formation on varying value relevance
between accounting}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{standards (or more generally, accounting methods) is
useful}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {to accounting
standard setters across the globe, although}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {timeliness is only one of several objectives of
accounting. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Section
5.2 showed some examples of value relevance re-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {search on different accounting standards.
This section gives }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{a more thorough overview on the subject. Section 7.1 pre-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {sents some typical studies within this
field of research. This }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {section in particular emphasises the value relevance
effects }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of altering
accounting regimes. Section 7.2 discusses the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {accounting treatment of intangibles.
Specifically, the ques-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tion of whether capitalisation or expensing renders
intangible }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {assets
more value relevant has been heavily investigated in}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {recent years. Section 7.3 investigates the
{effects of increased disclosure, while section 7.4
focuses }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {primarily
on a paper by Holthausen and Watts [149]. }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Holthausen and Watts [149] initiate a serious academic
dis-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {cussion, as
they criticise the value relevance research for }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {having made only a limited contribution to actual
accounting}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{standards. }\par\column\pard\li1613\ri0\sl-253\slmult0
426\slmult0 \fs20\cf0\f0\charscalex100\b {7.1. Some New Accounting
Standards\uc1\u8217X Influence on }\b0 \par\pard\li0\ri0\sl-226\slmult0
\fs18\cf0\f0\charscalex100\b {Value Relevance }\b0 \par\pard\li0\ri0\sl-333\slmult0
\fs20\cf0\f0\charscalex100 { Ayers [115] performs a very typical study within
value }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {relevance
research. His study is a comparison of the State-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ment of Financial Accounting Standards
(SFAS) No. 109}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Accounting for Income Taxes and Accounting Principles }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Board (APB) Opinion No. 11 Accounting for
Income Taxes. }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {He
investigates whether the net deferred tax liabilities under}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {SFAS No. 109 produces additional value
relevant informa-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tion
over the disclosure required by APB No. 11. His evi-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {dence suggests that the former provides
value relevant in-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{formation above and beyond the latter. The changes induced }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {by SFAS No. 109 include the separate
recognition of de-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ferred tax assets, the creation of valuation allowances for}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {deferred tax assets, and the adjustment of
deferred tax ac-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{counts for enacted tax rate changes. Ayers [115] finds that }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {all three changes are associated with firm
value. Another }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{typical study on the value relevance differences of various }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {accounting methods is performed by Hope
[150]. He investi-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{gates the ef ects of introducing deferred tax accounting in}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Norway. He concludes that this change in
the accounting}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{legislation significantly increased the value relevance of
earn-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ings. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 { Several
countries have adopted the International Ac-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {counting Standards (IAS) (denoted International
Financial}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Reporting
Standards from April 2001) over the last couple of }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {decades. Barth, Landsman and Lang [70]
examine whether }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
application of IAS is associated with higher accounting}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {quality. They conclude that firms applying
IAS exhibit less }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{earnings smoothing, less managing of earnings towards a }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {target, a more timely recognition of
losses, and a higher}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{association of accounting amounts with share prices and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {returns. Regarding value relevance, they
document a signifi-}\par\pard\li0\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{cantly larger R}{\super \fs12\up3\cf0\f0\charscalex100
{2}}\fs20\cf0\f0\charscalex100 { for IAS firms when running regressions
of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {price on net
income and equity book value. Their analyses }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {are based on comparisons of accounting quality metrics
for a }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {broad sample of
firms in 21 countries that adopted IAS be-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {tween 1994 and 2003. From 2005 and onwards,
European }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {law has
required that all companies listed on an European }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {stock exchange prepare their consolidated financial
state-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ments based on
International Financial Reporting Standards }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {(IFRS). The value relevance effect of introducing IFRS
in}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {European countries
is a popular research topic. For instance, }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Floros [151] finds that the introduction of IAS has a
negative }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {but
insignificant effect on the volatility of the Greek stock}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {market. Using a German sample, Hung and
Subramanyam }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[152]
find that book value and earnings are no more value }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {relevant under IAS than under the German
GAAP. However, }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Jermakowizc, Prather-Kinsey and Wulf [153] report in-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {creased value relevance of earnings after
the adoption of the }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{IFRS for the German DAX-30 companies, that is, the thirty }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {German companies listed on the Deutsche
B�rse with
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {largest market
capitalisation and turnover. In Finland, Nis-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {kanen, Kinnunen and Kasanen [154] report that the
recon-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ciliation of
Finnish GAAP to IAS earnings does not provide }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {significant value relevance. }\par\pard\li0\ri0\sl-
{7.2. Capitalisation or Expensing: The Case of Intangible }\b0
\par\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100\b {Assets }\b0
\par\pard\li0\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 { The treatment of
intangible assets is heavily debated }\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {among accountants. Several papers have looked at the
value }\par\pard\sect\sectd\sbkpage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\colno1\colw5946\colsr-0\colno2\colw3680\colsr-0\colno3\colw1813\pard\li613\ri0\sl-
253\slmult0 \fs16\cf0\f0\charscalex100\b {22 }\b0
\fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009, Volume 2}\b0
\i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100 {relevance of
alternative accounting methods. Lev and}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Sougiannis [135] analyse research and development
costs. }\par\column\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
{7.3. The Influence of Disclosure }\b0 \par\column\pard\li0\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100\b \i {Leif Atle Beisland }\b0 \i0
colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {U.S. GAAP mandates full expensing of R&D in
financial }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{statements. Lev and Sougiannis [135] compute firm-
specific }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {R&D
capital for a large number of public companies and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {adjust reported earnings and equity book
values to reflect the }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {capitalisation of R&D. They find that these adjustments
are }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {strongly
associated with stock prices and returns and con-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {clude that this suggests that R&D
capitalisation yields value }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevant information to investors. They also find that
R&D}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {capital is
associated with subsequent stock returns and claim }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that R&D capital does not seem to be fully
reflected in con-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{temporaneous stock prices. According to Lev and
Sougiannis }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {[135],
this result indicates either a systematic under-pricing }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {of R&D-intensive firms or that the excess
returns compen-}\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {sate
for an extra market risk factor associated with R&D. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {The absence of a relation between R&D
expenditures and its }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{subsequent benefits was a major reason for the FASB\uc1\u8217Xs
deci-}\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {sion to
require the full expensing of R&D outlays.}{\super \fs12\up3\cf0\f0\charscalex100
{30}}\fs20\cf0\f0\charscalex100 { Lev and }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {Sougiannis [135] maintain that this argument be
questioned. }\par\pard\li613\ri0\sl-333\slmult0 \fs20\cf0\f0\charscalex100 { The
conclusions of Lev and Sougiannis are [135] sup-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ported in general by Aboody and Lev [136]. They
specifi-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {cally look
at the capitalisation of software development}\par\pard\li613\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {costs.}{\super \fs12\up3\cf0\f0\charscalex100
{31}}\fs20\cf0\f0\charscalex100 { Similarly to Lev and Sougiannis [135], Aboody
and}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Lev [136] find
that capitalised development costs are posi-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {tively associated with stock returns. As for balance
sheet}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {measures, they
find that the cumulative capitalised software }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {costs are associated with stock prices.
Aboody and Lev [136]}\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100
{conclude that capitalisation is value-relevant for
investors. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {This
conclusion is also supported by their finding that soft-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {ware capitalisation is associated with
subsequent reported}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{earnings. However, Callen and Morel [155] find weaker }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {results than those reported by Lev and
Sougiannis [135] and}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Aboody and Lev [136]. When running firm-specific rather }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {than pooled regressions, they find that no
more than 25% of }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{companies exhibit significant associations between market }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {values and R&D. Monahan [61] demonstrates
that the con-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{servative treatment of R&D affects the return-earnings
rela-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tion only for
firms that experience high growth in R&D}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {during the return interval of
interest.}\par\pard\li613\ri0\sl-320\slmult0 \fs18\cf0\f0\charscalex100 { Cazavan-
Jeny and Jeanjean [156] also test the value }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance effect of different treatments of R&D
expendi-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tures.
Their study is performed on a French sample, as the }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {authors argue that the French context
provides an interesting}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {field for R&D value relevance studies, because both
treatments of R&D costs (i.e., expensing and capitalisa-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tion) are allowed in that country. They
document that the }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{firms choosing to capitalise R&D are smaller, more highly}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {leveraged, less profitable and have fewer
growth opportuni-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{ties. In contrast to Aboody and Lev [136] and Lev and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Sougiannis [135], Cazavan-Jeny and Jeanjean
[156] find that }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{capitalised R&D is negatively associated with stock
prices }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {and returns.
In other words, investors react negatively to the }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {capitalisation of R&D
expenses. }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
{30}\fs16\cf0\f0\charscalex100 { Value relevance was not the only reason that the
expensing of R&D }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{became required. These standards were also set in order to enhance
the}\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {reliability and
objectivity of estimates required for R&D capitalisation. }\par\pard\li613\ri0\sl-
200\slmult0 \fs10\cf0\f0\charscalex100 {31}\fs16\cf0\f0\charscalex100 { Note that
software capitalisation is, according to SFAS No. 86, an
excep-}\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {tion to the
full expensing rule of R&D. Software capitalisation pertains
to }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {the development
component of R&D. SFAS No. 86 offers flexibility by }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {allowing those who wish to expense this
component to do so. }\par\column\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 { The effect of increased disclosure is investigated by
}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Hope, Kang, Thomas
and Vasvari [157]. SFAS No. 131}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {introduced rather extensive changes in the disclosure
of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {information
related to geographic business segments and, }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {therefore, foreign earnings. Hope, Kang, Thomas
and}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Vasvari [157] find
strong support for the hypothesis that }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {increased disclosure is positively related to the
foreign earn-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ings
response coefficient. Their analysis shows that the for-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {eign earnings response coefficient
increases with (1) the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{introduction of SFAS No. 131, (2) an increase in the number}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {of geographic segments disclosed, and (3)
the inclusion of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{performance measures in geographic segments. In the previ-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ously-discussed article by Thomas [55], it
is suggested that }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{poor disclosure may have been one of the reasons why inves-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tors discounted the value of foreign
earnings for U.S. multi-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {nationals. The results of Hope, Kang, Thomas and
Vasvari}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[157] to a
large extent support this view. Ettredge, Soo}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {Young, Smith and Zarowin [158] also investigate the
adop-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tion of the SFAS
No. 131 segment disclosure rules by firms }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {and analyse possible changes in the stock
market\uc1\u8217Xs ability to}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {predict firm earnings. They find that single-segment
firms }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {that began
disclosing multiple segments experienced an }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {increase in their forward earnings response
coefficient, i.e., }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{the association between current-year returns and next-year }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {earnings. Analogous to Hope, Kang, Thomas
and Vasvari}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {[157],
Ettredge, Soo Young, Smith and Zarowin [158] con-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {clude that SFAS No. 131 enhances available
market infor-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {mation.
Consistent with this assertion, Hossain [159] reports }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {that the value relevance of quarterly
foreign sales data in-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{creases after firms adopt SFAS 131. Barth, Beaver and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Landsman [118] study the value relevance of
the fair value }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{disclosures of banks under SFAS No. 107 (see section 5.1). }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Their analysis suggests that disclosed fair
value estimates }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {under
SFAS No. 107 provide significant explanatory power }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {for bank stock prices beyond that provided
by book values. }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Specifically, they document that differences between fair }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {values and book values of securities, loans
and long-term }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {debt
are value-relevant. However, fair values of deposits and}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {off-balance sheet items do not seem
significantly value-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevant. }\par\pard\li0\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100
{ Disclosure does not have to be mandatory in order to }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {have value relevance effects. Lajili and
Zeghal [160] exam-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ine
the value relevance of the voluntary disclosure of labour}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {costs. They find that the relationship
between equity market }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{values and labour cost disclosures is positive and
significant. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Lajili
and Zeghal [160] suggest that investors view labour}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {costs as a proxy for human capital
investments and incorpo-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {rate this information into their firm valuation
processes. }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {They
conclude that this result might encourage further hu-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {man capital disclosure in the future. In
principle, the value }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevance of several voluntary disclosures can be investi-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {gated. For instance, Chee Yeow and Mui-
Siang [161] report}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{that the disclosure of quantitative value-at-risk (VaR) is }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {related to stock return. Lapointe-Antunes,
Cormier, Magnan}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {and
Gay-Angers [162] claim that Switzerland\uc1\u8217Xs financial}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {reporting system provides managers with
extensive discre-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tion
in corporate disclosure, and there are important varia-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tions in the level of information provided
in Swiss annual }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{reports. Lapointe-Antunes, Cormier, Magnan and Gay-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Angers [162] investigate how this
flexibility affects
earnings }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn
133\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\margtsx
n666\margbsxn240\cols2\colno1\colw5946\colsr-0\colno2\colw5493\pard\li613\ri0\sl-
Literature }\b0 \i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100
{smoothing and the value relevance of earnings. They
report }\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {that the use
of discretionary accruals to smooth earnings is }\par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\f0\charscalex100 {negatively related to voluntary disclosures by Swiss
firms. }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {They also
find that investors put a significantly lower valua-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {tion weight on discretionary accruals
reported by high-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{disclosing firms relative to low-disclosing firms, and
they }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {interpret this
as evidence that investors are in a better posi-}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {tion to detect discretionary accruals when a firm
voluntarily }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{discloses more information in its annual report. In
Denmark, }\par\pard\li613\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {Bangh�j
and Plenborg [163] find that }\fs20\cf0\f0\charscalex100 {more voluntary
disclo-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {sure does
not improve the association between current returns }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {and future earnings. These results contrast
the study of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Lapointe-Antunes, Cormier, Magnan and Gay-Angers [162], }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {as Bangh�j and
Plenborg }\fs20\cf0\f0\charscalex100 {[163]}{ }\fs20\cf0\f0\charscalex100 {suggest
that investors might }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{not be capable of incorporating voluntary information
into }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {their
estimates of firm value. }\par\pard\li613\ri0\sl-293\slmult0
\fs20\cf0\f0\charscalex100 { Hassel, Nilsson and Nyquist [164] find that in the
quar-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {terly
financial statements of Swedish listed companies, both}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the book value of equity and net income
provide value-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevant information to investors. However, their main
con-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tribution is to
prove that environmental performance (as }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {measured by an index developed for Swedish
institutional}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{investors) has an incremental explanatory power. Hassel, }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {Nilsson and Nyquist [164] state that the
environmental per-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{formance variable is used as a proxy for other value-
relevant }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{information in valuation models. Nevertheless, the
negative }\par\pard\li613\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{relationship between environmental performance and the }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {market value of equity indicates that firms
rated highly in}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{terms of environmental performance are not, }\fs20\cf0\f0\charscalex100\i {ceteris
paribus}\i0 \fs20\cf0\f0\charscalex100 {,}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {highly
valued by investors. Hassel, Nilsson and Nyquist }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {[164] suggest that the findings are due to
the fact that high }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{environmental performance is generally costly and thus has
a }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {negative impact
on expected earnings and market values. }\par\pard\li613\ri0\sl-426\slmult0
\fs20\cf0\f0\charscalex100\b {7.4. Contribution to Standard Setting }\b0
\par\pard\li893\ri0\sl-346\slmult0 \fs20\cf0\f0\charscalex100 {Holthausen and Watts
[149] claim that the existing value }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relevance literature\uc1\u8217Xs general contribution
to standard setting}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{seems modest. Even though the literature is large, they
claim }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that it does
not seek to develop a descriptive theory of ac-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {counting and standard setting. They also
state that even if the }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {value relevance literature\uc1\u8217Xs tests
effectively inform us about}\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {the role of accounting in providing inputs for equity
valua-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tion, those
tests still ignore the other roles of accounting and}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {other forces that determine accounting
standards and prac-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{tice. In response to Holthausen and Watts [149], Barth,
Bea-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ver and
Landsman [6] maintain that value relevance research }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {assesses how well accounting figures
reflect information}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{used by equity investors and provides insight into
questions }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of
interest to standard setters. They argue that since a pri-}\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {mary focus of financial statements is
equity investment, the }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {relation between equity prices and returns is of great
interest. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {Barth,
Beaver and Landsman [6] conclude that other uses of }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {financial statement information, such as
contracting, do not}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{diminish the importance of value relevance research. }\par\pard\li613\ri0\sl-
320\slmult0 \fs20\cf0\f0\charscalex100 { Ball, Robin and Sadka [165] use
international data to }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {study whether financial reporting is shaped by equity
mar-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {kets or by debt
markets. An analysis of 78,949 annual earn-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ings observations from 22 countries supports the
hypothesis }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that
important properties of financial reporting originate in }\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {the reporting demands of debt markets
rather than in equity}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{markets. They claim that these results are inconsistent
with }\par\column\pard\li1613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
\fs20\cf0\f0\charscalex100 {the basic premise of what they refer to as the value
relevance }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {school of
accounting thought, according to which financial }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {reporting exists primarily to inform equity
markets. In con-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{trast, the results are consistent with the hypothesis that
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {debt market
exerts a substantial impact on accounting prac-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {tices. The debt markets create a demand for financial
report-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ing that
scores highly on traditional metrics (i.e., explana-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {tory power and ERCs). The findings are
attributed to high }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{demands for timeliness and conservatism in the debt market. }\par\pard\li0\ri0\sl-
{8. CONCLUDING REMARKS}\b0 \par\pard\li293\ri0\sl-320\slmult0
\fs20\cf0\f0\charscalex100 {One of the major goals of financial reporting is to
assist }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {stock
investors in estimating company value. Value rele-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {vance research studies whether this goal is met by
investigat-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ing
statistical associations between market values of stocks }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {and accounting information. This review has
provided a }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{comprehensive study of the empirical value relevance litera-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {ture. Thus, it is now time to ask: is
accounting information }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{relevant for equity investors? The answer to this question
is }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {undoubtedly
\uc1\u8220Xyes.\uc1\u8221X The accounting summary measures
of }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {value and value
creation, that is, book value of equity and}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {earnings, respectively, are generally associated with
the }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {economic measures
of value and value creation, i.e., the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {market value of stocks and stock returns, respectively.
In }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {particular, book
values appear to be highly associated with}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {market values. Some argue that earnings, even if they
are }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {significantly
related to stock returns, have a disappointingly}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {low ability to explain variance in
accounting earnings. Nev-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ertheless, a large number of studies argue that the
earnings is systematically under-estimated when }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {traditional regression specifications are
employed. For in-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{stance, the misspecification of statistical models may lead
to }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
\uc1\u8220Xtrue\uc1\u8221X value relevance of earnings not being fully
cap-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {tured. Several
studies propose that the return-earnings asso-}\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ciation is non-linear and that this non-linearity must
be in-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {corporated in
regression specifications. Furthermore, there is }\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {much evidence suggesting that the valuation
impact of vari-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ous
earnings components varies across these components. }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Disaggregation of bottom-line earnings
often leads to sub-}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{stantial increases in value relevance.}\par\pard\li293\ri0\sl-306\slmult0
\fs20\cf0\f0\charscalex100 {Value relevance research has also devoted much
attention }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {to the
development of value relevance over time. It is often}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {argued that since today more firms heavily
rely on intangible }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{assets that generally cannot be recognised under existing}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {accounting regimes, accounting information
has become less }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{relevant during the last decades. The decline in value rele-}\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {vance may also be reinforced by an ever-
increasing pace of }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{change in business in general, especially if accounting in-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {formation is lagged. In the U.S., value
relevance studies }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{provide support for these views. There
is rather undisputed }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{evidence that the value relevance of earnings has decreased }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {over the last decades. Some studies find
that this decrease }\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{has been replaced to a certain extent by the increased rele-}\par\pard\li0\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {vance of book equity. Note that non-U.S.
studies generally}\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {do
not document decreases in the value relevance of either }\par\pard\li0\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {earnings or book
equity. }\par\pard\li293\ri0\sl-320\slmult0 \fs20\cf0\f0\charscalex100 {A large
body of value relevance literature focuses on the }\par\pard\li0\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {value relevance effects of varying accounting standards
or }\par\pard\li0\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {more general
accounting methods. A particularly up-and-}\par\pard\li0\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {coming subject within this research tradition is the
investiga-}\par\pard\li0\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {tion of
differences in value relevance between fair
value }\par\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133
\margtsxn666\margbsxn240\cols2\colno1\colw5946\colsr-
0\colno2\colw5493\pard\li613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b {24
}\b0 \fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009, Volume 2}\b0
\i0 \par\pard\li613\ri0\sl-426\slmult0 \fs20\cf0\f0\charscalex100 {accounting and
historical cost accounting. Several studies }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {suggest that the value relevance of the balance sheet
im-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {proves when fair
values are implemented. However, some }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {studies also show that the value relevance of earnings
actu-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {ally go down
if historical cost is abandoned. The value rele-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {vance literature has been able to illustrate to a small
degree }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {that from a
value relevance perspective, the discussion of fair}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {value versus historical cost may force
standard setters to}\par\pard\li613\ri0\sl-213\slmult0
\*\tx4013\fs18\cf0\f0\charscalex100 {choose between the value relevance of}\tab
\fs18\cf0\f0\charscalex100\i {either}\i0 \fs18\cf0\f0\charscalex100 { the
balance }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {sheet }
{ }\fs20\cf0\f0\charscalex100\i {or}\i0 \fs20\cf0\f0\charscalex100 { the income
statement. I expect this issue to be par-}\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {ticularly important in future value relevance research.
Value }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {relevance
research has also devoted much attention to the }\par\pard\li613\ri0\sl-226\slmult0
\fs20\cf0\f0\charscalex100 {treatment of intangibles, which is an issue closely
related to}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {the fair
value discussion. Most value relevance research }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {suggests that increased capitalisation of intangibles
will}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {render
financial reports more relevant to stock investors. }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {However, this literature tends to ignore
that other uses of }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{financial reports, for instance, by creditors or the
govern-}\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {ment, demand
a large degree of objectivity and measurability}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {for accounting numbers. I anticipate that
future value rele-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{vance research will have to take into account the other
roles }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100 {of financial
reporting when assessing the general usefulness }\par\pard\li613\ri0\sl-213\slmult0
\fs20\cf0\f0\charscalex100 {of accounting information. Such an approach will
increase }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100 {the
usefulness of this research from a standard setting per-}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {spective. }\par\pard\li613\ri0\sl-
\fs20\cf0\f0\charscalex100\b {ACKNOWLEDGEMENTS}\b0 \par\pard\li613\ri0\sl-
346\slmult0 \fs20\cf0\f0\charscalex100 { I would like to thank Fr�ystein Gjesdal
and Kjell H. }\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{Knivsfl�, the Norwegian School of Economics and Business }\par\pard\li613\ri0\sl-
213\slmult0 \fs20\cf0\f0\charscalex100 {Administration, John C. Langli, the
Norwegian School of }\par\pard\li613\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex100
{Management, Dennis Frestad, the University of Agder, and}\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100 {two anonymous reviewers for helpful
suggestions and com-}\par\pard\li613\ri0\sl-213\slmult0 \fs20\cf0\f0\charscalex100
{ments. }\par\pard\li613\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li613\ri0\sl-
226\slmult0 \fs20\cf0\f0\charscalex100\b {REFERENCES }\b0 \par\pard\li613\ri0\sl-
306\slmult0 \*\tx1186\fs16\cf0\f0\charscalex100 {[1] }\tab
\fs16\cf0\f0\charscalex100 {Kothari SP. Capital markets research in accounting. J
Account }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Econ 2001;
31: 105-231. }\par\pard\li613\ri0\sl-173\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[2] }\tab \fs16\cf0\f0\charscalex100 {Beaver
WH. Perspectives on recent capital market research. Ac-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {count Rev 2002; 77: 453-
74. }\par\pard\li613\ri0\sl-173\slmult0 \*\tx1186\fs16\cf0\f0\charscalex100
{[3] }\tab \fs16\cf0\f0\charscalex100 {Francis J, LaFond R, Olsson PM, Schipper K.
Costs of equity and }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{earnings attributes. Account Rev 2004; 79: 967-1010. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Ball R, Brown P. An empirical evaluation of accounting
income }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {numbers. J
Account Res 1968; 6: 159-78. }\par\pard\li613\ri0\sl-173\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[5] }\tab \fs16\cf0\f0\charscalex100 {Beaver
WH. The information content of annual earnings an-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {nouncements. J Account Res 1968; 6: 67-
{[6] }\tab \fs16\cf0\f0\charscalex100 {Barth ME, Beaver WH, Landsman WR. The
relevance of the value}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {relevance literature for
financial }\fs16\cf0\f0\charscalex100 {accounting standard
se}\fs16\cf0\f0\charscalex100 {tting: An-}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {other view. J Account Econ 2001; 31: 77-
{[7] }\tab \fs16\cf0\f0\charscalex100 {Amir E, Harris TS, Venuti EK. A comparison
of the value-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{relevance of US versus non-US. GAAP accounting measures
using }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {form 20-F
reconciliations. J Acc}\fs16\cf0\f0\charscalex100 {ount Res 1993; 31: 230-
{[8] }\tab \fs16\cf0\f0\charscalex100 {Williams J. The theory of investment value.
Harvard University }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{Press: Cambridge 1938. }\par\pard\li613\ri0\sl-173\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[9] }\tab \fs16\cf0\f0\charscalex100 {Feltham
GA, Ohlson JA. Valuation and clean surplus accounting }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {for operating and financial activities.
Contemp Account Res 1995;}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {11: 689-731. }\par\pard\li613\ri0\sl-186\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[10] }\tab \fs16\cf0\f0\charscalex100
{Christensen P, Feltham GA. Economics of accounting,
Information }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {in
markets. Springer 2003; Vol. 1. }\par\pard\li613\ri0\sl-186\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[11] }\tab \fs16\cf0\f0\charscalex100 {Ohlson
JA. Earnings, book values, and dividends in equity valua-}\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {tion. Contemp Account Res 1995; 11: 661-87.
}\par\pard\li613\ri0\sl-186\slmult0 \*\tx1186\fs16\cf0\f0\charscalex100 {[12] }\tab
\fs16\cf0\f0\charscalex100 {Preinreich GAD. A}\fs16\cf0\f0\charscalex100 {nnual
survey of economic theory: The theory of }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {depreciation. Econometrica 1938; 6: 219-
{[13] }\tab \fs16\cf0\f0\charscalex100 {Edwards EO, Bell PW. The theory and
measurement of business }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {income. University of California Press
1961. }\par\pard\li613\ri0\sl-186\slmult0 \*\tx1186\fs16\cf0\f0\charscalex100 {[14]
}\tab \fs16\cf0\f0\charscalex100 {Pinto JA. How comprehensive is comprehensive
income? The }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {value
relevance of foreign currency translation adjustments. J
Int }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Financ Manag
Account 2005; 16: 97-122. }\par\column\pard\li3680\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100 {Francis J, Schipper K. Have financial statements lost
their rele-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {vance? J
\*\tx573\fs16\cf0\f0\charscalex100 {[16] }\tab \fs16\cf0\f0\charscalex100 {Penman
SH. Combining earnings and book value in equity valua-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {tion. Contemp Account Res 1998; 15: 291-
{[17] }\tab \fs16\cf0\f0\charscalex100 {Fama EF, French KR. The cross-section of
expected stock returns. }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {J Finance 1992; 47: 427-65. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Fama EF, French KR. Common risk factors in the returns
on stocks }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {and
bonds. J Financ Econ 1993; 33: 3-56. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[19] }\tab \fs16\cf0\f0\charscalex100 {Easton
PD, Zmijewski ME. Cross-sectional variation in the stock }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {market response to accounting earnings
announcements. J Account }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {Econ 1989; 11: 117-41. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Freeman RN, Tse SY. A nonlinear model of security price
re-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {sponses to
unexpected earnings. J Account Res 1992; 30: 185-209. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Kormendi R, Lipe R. Earnings innovations, earnings
persistence, }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {and
stock returns. J Bus 1987; 60: 323-45. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[22] }\tab \fs16\cf0\f0\charscalex100 {Ahmed
AS. Accounting earnings and future economic rents. J }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Account Econ 1994; 17: 377-
{[23] }\tab \fs16\cf0\f0\charscalex100 {Landsman WR, Magliolo J. Cross-sectional
capital market research }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {and model specification. Account Rev 1988; 63:
{[24] }\tab \fs16\cf0\f0\charscalex100 {Kothari SP, Zimmerman JL. Price and return
models. J Account }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{Econ 1995; 20: 155-92. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[25] }\tab \fs16\cf0\f0\charscalex100 {Liu J,
Thomas J. Stock returns and accounting earnings. J Account }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Res 2000; 38: 71-
{[26] }\tab \fs16\cf0\f0\charscalex100 {Kothari SP, Sloan RG. Information in prices
about future earnings: }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {Implications for earnings response coefficients. J
Account Econ }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {1992;
15: 143-71. }\par\pard\li0\ri0\sl-173\slmult0 \*\tx573\fs16\cf0\f0\charscalex100
{[27] }\tab \fs16\cf0\f0\charscalex100 {Beaver WH, Lambert RA, Ryan SG. The
information content of }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {security prices: A second look. J Account Econ 1987; 9:
139-57. }\par\pard\li0\ri0\sl-186\slmult0 \*\tx573\fs16\cf0\f0\charscalex100
{[28] }\tab \fs16\cf0\f0\charscalex100 {Collins DW, Kothari SP, Shanken J, Sloan
RG. Lack of timeliness }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {and noise as explanations for the low contemporaneous
return-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {earnings
association. J Account Econ 1994; 18: 289-324. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[29] }\tab \fs16\cf0\f0\charscalex100 {Christie
AA. On cross-sectional analysis in accounting research. J }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Account Econ 1987; 9: 231-
{[30] }\tab \fs16\cf0\f0\charscalex100 {Barth ME, Cram DP, Nelson KK. Accruals and
the prediction of }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{future cash flows. Account Rev 2001; 76: 27-58. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Francis J, Smith M. A reexamination of the persistence
of accruals }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {and
cash flows. J Account Res 2005; 43: 413-51. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[32] }\tab \fs16\cf0\f0\charscalex100 {Sloan
RG. Do stock prices fully reflect information in accruals
and }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {cash flows
about future earnings? Account Rev 1996; 71: 289-315. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Barth ME, Kallapur S. The effects of cross-sectional
scale differ-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {ences
on regression results in empirical accounting research.
Con-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {temp Account
Res 1996; 13: 527-67. }\par\pard\li0\ri0\sl-173\slmult0
PD, Sommers GA. Scale and the scale effect in market-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {based accounting research. J Bus Financ
Account 2003; 30: 25-55. }\par\pard\li0\ri0\sl-173\slmult0
PD, Harris TS. Earnings as an explanatory variable for }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {returns. J Account Res 1991; 29: 19-
{[36] }\tab \fs16\cf0\f0\charscalex100 {Brown S, Kin L, Lys T. Use of
R }\fs16\cf0\f0\charscalex100 { in accounting research:
measur-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {ing changes
in value relevance over the last four decades. J Ac-}\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {count Econ 1999; 28: 83-
{[37] }\tab \fs16\cf0\f0\charscalex100 {Gu Z. Across-sample incomparability of R2s
and additional evi-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{dence on value relevance changes over time. J Bus Financ
Account }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {2007; 34:
1073-98. }\par\pard\li0\ri0\sl-173\slmult0 \*\tx573\fs16\cf0\f0\charscalex100 {[38]
}\tab \fs16\cf0\f0\charscalex100 {Piotroski JD. Value investing: The use of
historical financial state-}\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {ment information to separate winners from losers. J
Account Res }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {2000;
{[39] }\tab \fs16\cf0\f0\charscalex100 {Aboody D, Hughes J, Liu J. Measuring value
relevance in a (Possi-}\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {bly) inefficient market. J Account Res 2002; 40: 965-
{[40] }\tab \fs16\cf0\f0\charscalex100 {Hann RN, Heflin F, Subramanayam KR. Fair-
value pension ac-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{counting. J Account Econ 2007; 44: 328-58. }\par\pard\li0\ri0\sl-186\slmult0
{Subramanyam KR, Venkatachalam M. Earnings, cash flows,
and }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {ex Post
intrinsic value of equity. Account Rev 2007; 82: 457-81. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Caylor ML, Lopez TJ, Rees L. Is the value relevance of
earnings }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{conditional on the timing of earnings information? J Account
Pub-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {lic Policy
2007; 26: 62-95. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[43] }\tab \fs16\cf0\f0\charscalex100 {Collins
DW, Kothari SP. An analysis of intertemporal and cross-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {sectional determinants of earnings response
coefficients. J Account }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {Basu S. The conservatism principle and the asymmetric
timeliness }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {of
earnings. J Account Econ
\*\tx573\fs16\cf0\f0\charscalex100 {[45] }\tab \fs16\cf0\f0\charscalex100 {Lev B.
On the usefulness of earnings and earnings research: Les-}\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {sons and directions from two decades of
empirical research. J Ac-}\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {count Res 1989; 27: 153-92.}\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Dechow PM, Ge W. The persistence of earnings and cash
flows }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {and the role
of special items: Implications for the accrual anomaly. }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Rev Account Stud 2006; 11: 253-
96. }\par\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\m
argtsxn666\margbsxn253\cols2\colno1\colw5946\colsr-
\fs16\cf0\f0\charscalex100 {Penman SH, Xiao-Jun Z. Accounting conservatism, the
quality of }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{earnings, and stock returns. Account Rev 2002; 77: 237-
{[48] }\tab \fs16\cf0\f0\charscalex100 {Jing L, Thomas J. Stock returns and
accounting earnings. J Ac-}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {count Res 2000; 38: 71-101. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Hayn C. The information content of losses. J Account
Econ 1995; }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {20:
{[50] }\tab \fs16\cf0\f0\charscalex100 {Beaver WH, McAnally ML, Stinson CH. The
information content}\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{of earnings and prices: A simultaneous equations approach. J
Ac-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {count Econ
PD, Harris TS, Ohlson JA. Aggregate accounting earnings }\par\pard\li1186\ri0\sl-
173\slmult0 \fs14\cf0\f0\charscalex100 {can explain most of security returns. J
Account Econ 1992; 15: }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {119-42. }\par\pard\li613\ri0\sl-173\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[52] }\tab \fs16\cf0\f0\charscalex100 {Ohlson
JA, Penman SH. Disaggregated accounting data as explana-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {tory variables for returns. J Account Audit
Finance 1992; 7: 553-}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {73. }\par\pard\li613\ri0\sl-186\slmult0
{Ramakrishnan RTS, Thomas JK. Valuation of permanent,
transi-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {tory, and
price-irrelevant components of reported earnings. J Ac-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {count Audit Finance 1998; 13: 301-
{[54] }\tab \fs14\cf0\f0\charscalex100 {Rayburn J. The association of operating
cash flow and accruals }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {with security returns. J Account Res 1986; 24: 112-
{[55] }\tab \fs14\cf0\f0\charscalex100 {Thomas WB. A test of the market's
mispricing of domestic and }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {foreign earnings. J Account Econ 1999; 28: 243-
{[56] }\tab \fs14\cf0\f0\charscalex100 {Marquardt CA, Wiedman CI. The effect of
earnings management }\par\pard\li1186\ri0\sl-186\slmult0 \fs14\cf0\f0\charscalex100
{on the value relevance of accounting information. J Bus
Finance }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {Account
{Christensen TE, Hoyt RE, Paterson JS. Ex ante incentives
for }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {earnings
management and the informativeness of earnings. J Bus }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {Finance Account 1999; 26: 807-
{[58] }\tab \fs16\cf0\f0\charscalex100 {Ball R, Kothari SP, Robin A. The effect of
international institu-}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {tional factors on properties of accounting earnings. J
Account Econ }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {2000;
{[59] }\tab \fs16\cf0\f0\charscalex100 {Elgers PT, Porter SL, Emily Xu L. The
timing of industry and firm }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {earnings information in security prices: A re-
evaluation. J Account}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {Francis J, Schipper K, Vincent L. The relative and
incremental}\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{explanatory power of earnings and alternative (to Earnings)
per-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {formance
measures for returns. Contemp Account Res 2003; 20: }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {121-64. }\par\pard\li613\ri0\sl-173\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[61] }\tab \fs16\cf0\f0\charscalex100 {Monahan
SJ. Conservatism, growth and the role of accounting }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {numbers in the fundamental analysis
process. Rev Account Stud}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {2005; 10: 227-60. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Guay WR, Kothari SP, Watts RL. A market-based
evaluation of }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{discretionary accrual models. J Account Res 1996; 34: 83-
{[63] }\tab \fs16\cf0\f0\charscalex100 {Ben-Hsien B, Da-Hsien B. Income smoothing,
earnings quality and }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {firm valuation. J Bus Finance Account 2004; 31: 1525-
{[64] }\tab \fs16\cf0\f0\charscalex100 {Osmundsen P, Asche F, Misund B, Mohn K.
Valuation of interna-}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {tional oil companies. Energy J 2006; 27: 49-
{[65] }\tab \fs16\cf0\f0\charscalex100 {Lara JMG, Osma BG, Noguer BG-d-A. Effects
of database choice }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{on international accounting research. Abacus 2006; 42: 426-
{[66] }\tab \fs16\cf0\f0\charscalex100 {Ali A, Lee-Seok H. Country-specific factors
related to financial }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {reporting and the value relevance of accounting data. J
Account }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Res 2000;
{[67] }\tab \fs16\cf0\f0\charscalex100 {Othman HB, Zeghal D. A study of earnings-
management motives }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{in the Anglo-American and Euro-Continental accounting
models:}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {The
Canadian and French cases. Int J Account 2006; 41: 406-35. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Mingyi H. Accounting standards and value relevance of
financial }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{statements: An international analysis. J Account Econ 2000;
30:}\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {401-
{[69] }\tab \fs16\cf0\f0\charscalex100 {Brown WD, He H, Teitel K. Conditional
conservatism and the }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {value relevance of accounting earnings: An
international study. Eur }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {Account Rev 2006; 15: 605-26. }\par\pard\li613\ri0\sl-
\fs14\cf0\f0\charscalex100 {Barth ME, Landsman WR, Lang MH. International
accounting }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{standards and accounting qua}\fs16\cf0\f0\charscalex100 {lity. J
Acc}\fs16\cf0\f0\charscalex100 {ount Res 2008; 46: 467-98. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Frank K. The effect of growth on the value relevance of
accounting }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {data. J
Bus Res 2002; 55: 69-78. }\par\pard\li613\ri0\sl-186\slmult0
\*\tx1186\fs16\cf0\f0\charscalex100 {[72] }\tab \fs16\cf0\f0\charscalex100 {Biddle
GC, Seow GS. The estimation and determinants of associa-}\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {tions between returns and earnings:
Evidence from cross-industry }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {comparisons. J Account Audit Finance 1991; 6: 183-
{[73] }\tab \fs16\cf0\f0\charscalex100 {Teets WR, Wasley CE. Estimating earnings
response coefficients: }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {Pooled versus firm-specific models. J Account Econ
1996; 21: 279-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{95. }\par\pard\li613\ri0\sl-186\slmult0 \*\tx1186\fs16\cf0\f0\charscalex100
{[74] }\tab \fs16\cf0\f0\charscalex100 {Collins DW, Maydew EL, Weiss IS. Changes in
the value-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{relevance of earnings and book values over the past forty years.
J }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Account Econ
{Darrough M, Ye J. Valuation of loss firms in a knowledge-
based }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {economy. Rev
Account Stud 2007; 12: 61-93. }\par\column\pard\li1613\ri0\sl-253\slmult0
\fs16\cf0\f0\charscalex100 {Joos P, Plesko GA. Valuing loss firms. Account Rev
2005; 80: }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {847-
{[77] }\tab \fs16\cf0\f0\charscalex100 {Finger CA. The ability of earnings to
predict future earnings and }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {cash flow. J Account Res 1994; 32: 210-
{[78] }\tab \fs16\cf0\f0\charscalex100 {Dechow PM, Kothari SP, Watts RL. The
relation between earnings }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {and cash flows. J Account Econ 1998; 25: 133-
{[79] }\tab \fs16\cf0\f0\charscalex100 {Barth ME, Beaver WH, Hand JRM, Landsman WR.
Accruals, }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{accounting-based valuation models, and the prediction of
equity }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {values. J
Account Audit Finance 2005; 20: 311-45. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[80] }\tab \fs16\cf0\f0\charscalex100 {Landsman
WR, Miller BL, Yeh S. Implications of components of }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {income excluded from pro forma earnings for
future profitability }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{and equity valuation. J Bus Finance Account 2007; 34: 650-
{[81] }\tab \fs16\cf0\f0\charscalex100 {Dhaliwal D, Subramanyam KR, Trezevant R. Is
comprehensive }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{income superior to net income as a measure of firm performance?
J }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {Account Econ
\*\tx573\fs16\cf0\f0\charscalex100 {[82] }\tab \fs16\cf0\f0\charscalex100 {Bradshaw
MT, Sloan RG. GAAP versus the street: An empirical }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {assessment of two alternative definitions
of earnings. J Account}\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {Res 2002; 40: 41-66. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Cornell B, Landsman WR. Accounting valuation: Is
earnings }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {quality an
issue? Financ Anal J 2003; 59: 20-28. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[84] }\tab \fs16\cf0\f0\charscalex100 {Choi Y-
S, Lin S, Walker M, Young S. Disagreement over the }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {persistence of earnings components:
evidence on the properties of }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {management-specific adjustments to GAAP earnings. Rev
Account }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Stud 2007;
{[85] }\tab \fs16\cf0\f0\charscalex100 {Pope PF. Discussion--Accruals, accounting-
based valuation mod-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{els, and the prediction of equity values. J Account Audit
Finance}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {2005; 20:
{[86] }\tab \fs16\cf0\f0\charscalex100 {Carnes TA. Unexpected changes in quarterly
financial-statement }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{line items and their relationship to stock prices. Acad Account
Fi-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {nanc Stud J
\*\tx573\fs16\cf0\f0\charscalex100 {[87] }\tab \fs16\cf0\f0\charscalex100 {Bodnar
GM, Weintrop J. The valuation of the foreign income of }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {US multinational firms: a growth
o}\fs16\cf0\f0\charscalex100 {pportun}\fs16\cf0\f0\charscalex100 {ities
perspective. J Ac-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{count Econ 1997; 24: 69-97. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[88] }\tab \fs16\cf0\f0\charscalex100 {Hope O-
K, Kang T. The role of "Other Information" in the valua-}\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {tion of foreign income for US.
Multinationals. J Acc}\fs16\cf0\f0\charscalex100 {ount Audit
Fi-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {nance 2005; 20:
{[89] }\tab \fs16\cf0\f0\charscalex100 {Callen JL, Hope O-K, Segal D. Domestic and
foreign earnings, }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{stock return variability, and the impact of investor sophistication.
J }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {Account Res 2005;
{[90] }\tab \fs16\cf0\f0\charscalex100 {FASB. Financial accounting standards board.
Objectives of finan-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{cial reporting by business enterprises. Statement of financial
ac-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {counting
concepts No 1, 1978. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[91] }\tab \fs16\cf0\f0\charscalex100 {Ball R,
Shivakumar L. The role of accruals in asymmetrically }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {timely gain and loss recognition. J Account
Res 2006; 44: 207-42. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[92] }\tab \fs16\cf0\f0\charscalex100 {Dechow
PM. Accounting earnings and cash flows as measures of }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {firm performance: The role of accounting
accruals. J Account Econ }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {1994; 18: 3-42. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[93] }\tab \fs16\cf0\f0\charscalex100 {Bowen
RM, Burgstahler D, Daley LA. Evidence on the relation-}\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {ships between earnings and various measures
of cash flow. Ac-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{count Rev 1986; 61: 713-25. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[94] }\tab \fs16\cf0\f0\charscalex100 {Livnat
J, Zarowin P. The incremental information content of cash-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {flow components. J Account Econ 1990; 13:
{[95] }\tab \fs16\cf0\f0\charscalex100 {Biddle GC, Seow GS, Siegel AF. Relative
versus incremental}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{information content. Contemp Account Res 1995; 12: 1-23. }\par\pard\li0\ri0\sl-
\fs16\cf0\f0\charscalex100 {Liu J, Nissim D, Thomas J. Is cash flow king in
valuations? Financ }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{Anal J 2007; 63: 56-68. }\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[97] }\tab \fs16\cf0\f0\charscalex100 {Lianzan
X, Cai F. The valuation of high-tech "New economy" }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {companies. J Global Comp 2005; 13: 1-
8. }\par\pard\li0\ri0\sl-173\slmult0 \*\tx573\fs16\cf0\f0\charscalex100 {[98] }\tab
\fs16\cf0\f0\charscalex100 {Monahan SJ. Discussion of the value relevance of
revenue for }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{internet firms: Does reporting grossed-up or barter revenue make
a }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {difference? J
\*\tx573\fs16\cf0\f0\charscalex100
{[99] }\tab \fs16\cf0\f0\charscalex100 {Davis AK. The value relevance of evenue
for internet firms: Does }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {reporting grossed-up or barter revenue make a
difference? J Ac-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{count Res 2002; 40: 445-77.}\par\pard\li0\ri0\sl-173\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[100] }\tab \fs16\cf0\f0\charscalex100 {Kim O,
Lim SC, Park T. Measuring the impact of sales on earnings }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {and equity price. Rev Quant Finance Account
2008, Feb 20 [Re-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{trieved 2008 Oct 8]. Available from: http}\fs16\cf0\f0\charscalex100
{://www.springerlink.com/ }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {content/6703411507810316/ }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[101] Callen JL, Segal D. Do accruals
drive firm-level stock returns? A }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {variance decomposition analysis. J Account Res 2004;
42: 527-60.}\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[102]
Konan Chan A, Jegadeesh N, Sougiannis T. The accrual effect
on}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {future earnings.
Rev Quant Finance Account 2004; 22: 97-121. }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[103] Collins DW, Hribar P. Earning-based
and }\fs16\cf0\f0\charscalex100 {accrual -based market }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {anomalies: one effect or two? J Account
Econ 2000; 29: 101-23. }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{[104] Bernard VL, Stober TL. The nature and amount of information
in }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {cash flows and
accruals. Account Rev 1989; 64: 624-
52. }\par\pard\sect\sectd\sbkpage\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\m
argtsxn666\margbsxn253\cols2\colno1\colw5946\colsr-
0\colno2\colw5493\pard\li613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b {26
}\b0 \fs16\cf0\f0\charscalex100\b \i {The Open Business Journal, 2009, Volume 2}\b0
\i0 \par\pard\li613\ri0\sl-386\slmult0 \fs16\cf0\f0\charscalex100 {[105] Wilson
GP. The relative information content of accruals and cash }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {flows: Combined evidence at the earnings
announcement and an-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{nual report release date. J Account Res 1986; 24: 165-
200. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[106] Lev B,
Nissim D. The persistence of the accruals anomaly. Con-}\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {temp Account Res 2006; 23: 193-
226. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[107] Pincus
M, Rajgopal S, Venkatachal M. The accrual anomaly: }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {International evidence. Account Rev 2007;
82: 169-203. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[108]
Hribar P, Collins DW. Errors in estimating }\fs16\cf0\f0\charscalex100 {accruals:
Implications }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {for
empirical research. J Account Res 2002; 40: 105-34. }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[109] Chen S, Dodd JL. Operating income,
residual income and }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{EVA(TM): Which metric is more value relevant? J Manag
Issues }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {2001; 13:
65-86. }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[110]
Dechow PM, Hutton AP, Sloan RG. An empirical assessment
of }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {the residual
income valuation model. J Account Econ 1999; 26: 1-}\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {34. }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {[111] Biddle GC, Bowen RM, Wallace JS. Does EVA}
{\super \fs10\up2\cf0\f0\charscalex100 {�}}\fs16\cf0\f0\charscalex100 { beat
earnings? }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {Evidence
on associations with stock returns and firm values. J Ac-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {count Econ 1997; 24: 301-
{[112] }\tab \fs16\cf0\f0\charscalex100 {Kyriazis D, Anastassis C. The validity of
the economic value added }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {approach: an empirical application. Eur Financ Manage
100. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[113] Tsuji
C. Does EVA beat earnings and cash flow in Japan? Appl }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Financ Econ 2006; 16: 1199-
216. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[114] Bettman
JL. Australian evidence regarding the value-relevance of }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {technical information. Aust J Manage 2007;
Ayers BC. Deferred tax accounting under SFAS No. 109: An }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {empirical investigation of its incremental
value-relevance relative }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {to APB No. 11. Account Rev 1998; 73: 195-
212. }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[116] Barth
ME, Beaver WH, Landsman WR. Relative valuation roles of }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {equity book value and net income as a
function of financial health. }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {J Account Econ 1998; 25: 1-34. }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[117] Dontoh A, Radhakrishnan S, Ronen J.
The declining value-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{relevance of accounting information and non-information-
based }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {trading: An
empirical analysis. Contemp Account Res 2004; 21: }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {795-812. }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[118] Barth ME, Beaver WH, Landsman WR.
Value-relevance of banks' }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {fair value disclosures under SFAS No. 107. Account Rev
37. }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[119] Khurana
IK, Myung-Sun K. Relative value relevance of historical }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {cost vs. fair value: Evidence from bank
holding companies. J Ac-}\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {count Public Policy 2003; 22: 19-
42. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[120] Carroll
TJ, Linsmeier TJ, Petroni KR. The reliability of fair
value }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {versus
historical cost information: Evidence from closed-end mu-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {tual funds. J Account Audit Finance 2003;
Finnegan PM, Mertz MJ, Penman SH, Victor GL. The role of }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {mark-to-market accounting in the financial
crisis. CPA J 2009; 79: }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {20-4. }\par\pard\li613\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {[122] Danbolt J, Rees W. An experiment in fair value
accounting: UK }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{investment vehicles. Eur Account Rev 2008; 17: 271-303. }\par\pard\li613\ri0\sl-
\fs16\cf0\f0\charscalex100 {Horton J. The value relevance of 'realistic reporting':
evidence from }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {UK
life insurers. Account Bus Res 2007; 37: 175-97. }\par\pard\li613\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[124] Bae K-H, Jeong SW. The value-
relevance of earnings and book }\par\pard\li1186\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {value, Ownership structure, and business group
affiliation: Evi-}\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{dence from korean business groups. J Bus Finance Account
2007; }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {34: 740-
Thiagarajan SR. Fundamental information analysis. J }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Account Res 1993; 31: 190-
215. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[126] Petroni
KR, Wahlen JM. Fair values of equity and debt securities }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {and share prices of property-liability
insurers. J Risk Insur 1995;}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {62: 719-37. }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[127] Harris TS, Ohlson JA. Accounting disclosures and
the market's }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{valuation of oil and gas properties: Evaluation of market
efficiency }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {and
functional fixation. Account Rev
1990; 65: 764-80. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{[128] Barth ME. Fair value accounting: Evidence from investment
secu-}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {rities and
the market valuation of banks. Account Rev 1994; 69: I-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {25. }\par\pard\li613\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[129] Vincent L. Equity valuation implications of
purchase versus pool-}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {ing accounting. J Financ Statement Anal 1997; 2: 5-
19. }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[130] Davis
ML. Differential market reaction to pooling and purchase }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {methods. Account Rev 1990; 65: 696-
709. }\par\pard\li613\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[131] Graham
Jr RC, Lefanowicz CE, Petroni KR. The value relevance }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {of equity method fair value disclosures. J
Bus Finance Account}\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{2003; 30: 1065-88. }\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{[132] Barth ME, Clinch G. Revalued financial, tangible, and
intangible }\par\pard\li1186\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {assets:
Associations with share prices and non-market-based value }\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {estimates. J Account Res 1998; 36: 199-233.
}\par\column\pard\li3680\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i {Leif
Atle Beisland }\b0 \i0 \par\pard\li0\ri0\sl-386\slmult0 \fs16\cf0\f0\charscalex100
{[133] Givoly D, Hayn C. The valuation of the deferred tax
liability:}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Evidence
from the stock market. Account Rev 1992; 67: 394-410. }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[134] Amir E, Kirschenheiter M, Willard K.
The valuation of deferred }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {taxes. Contemp Account Res 1997; 14: 597-
Sougiannis T. The capitalization, amortization, and value-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {relevance of R&D. J Account Econ 1996; 21:
107-38. }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[136] Aboody
D, Lev B. The value relevance of intangibles: The case of }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {software capitalization. J Account Res
{[137] Collins DW, Henning S. Write-down timeliness, line-of-
business }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{disclosures and investors' interpretations of segment divestiture
an-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {nouncements. J
Bus Finance Account 2004; 31: 1261-99. }\par\pard\li0\ri0\sl-186\slmult0
\*\tx573\fs16\cf0\f0\charscalex100 {[138] }\tab \fs16\cf0\f0\charscalex100 {Francis
J, Hanna JD, Vincent L. Causes and effects of
discretionary }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {asset
write-offs. J Account Res 1996; 34: 117-34. }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {[139] Barth ME, Beaver WH, Landsman WR. The market
valuation}\par\pard\li573\ri0\sl-173\slmult0 \fs14\cf0\f0\charscalex100
{implications of net periodic pension cost components. J
Account }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Econ 1992;
Biddle GC, Lindahl FW. Stock price reactions to LIFO
adoptions: }\par\pard\li573\ri0\sl-186\slmult0 \fs14\cf0\f0\charscalex100 {The
association between excess returns and LIFO tax Savings. J }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Account Res 1982; 20: 551-
Zarowin P. The boundaries of financial reporting and how }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {to extend them. J Account Res 1999; 37:
353-85.}\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[142] Jorion
P, Shi C, Zhang S. Tightening credit standards: the role
of }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {accounting
qua}\fs16\cf0\f0\charscalex100 {lity. Rev Account Stud 2009; 14: 123-
60. }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[143] Ely K,
Waymire G. Accounting standard-setting organizations and }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {earnings relevance: longitudinal evidence
from NYSE common }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{stocks, 1927-93. J Account Res 1999; 37: 293-317. }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[144] Brimble M, Hodgson A. On the
intertemporal value relevance of }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {conventional financial accounting in Australia. Account
Finance }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {2007; 47:
599-622. }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[145]
Thinggaard F, Damkier J. Has financial statement
information }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {become
less relevant? longitudinal evidence from Denmark. Scand }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {J Manage 2008; 24: 375-
87. }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[146] Balkrishna
H, Coulton JJ, Taylor SL. Accounting losses and earn-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {ings conservatism: evidence from Australian
generally accepted }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{accounting principles. Account Finance 2007; 47: 381-400. }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[147] Hellstr�m K. The value relevance of
financial accounting informa-}\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {tion in a transition economy: The case of the Czech
Republic. Eur }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{Account Rev 2006; 15: 325-49. }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[148] Kim M, Kross W. The ability of earnings to
predict future operat-}\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {ing cash flows has been increasing - not decreasing.
CFA Digest }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {2006;
Holthausen RW, Watts RL. The relevance of the value-
relevance }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{literature for financial }\fs16\cf0\f0\charscalex100 {accounting standard
se}\fs16\cf0\f0\charscalex100 {tting. J Account Econ }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {2001; 31: 3-75. }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[150] Hope O-K. Value relevance effects of
the introduction of interpe-}\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {riod tax allocation: The case of Norway. Adv Int
Account 1999; 12; }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100
{157-91. }\par\pard\li0\ri0\sl-186\slmult0 \*\tx573\fs16\cf0\f0\charscalex100
{[151] }\tab \fs16\cf0\f0\charscalex100 {Floros C. The effects of international
accounting standards on stock }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {market volatility: The case of
Gre}\fs16\cf0\f0\charscalex100 {ece. Invest Manage Financ
Inno-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {vat 2007; 4:
61-72. }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[152] Hung M,
Subramanyam K. Financial statement effects of adopting}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {international accounting standards: the
case of Germany. Rev Ac-}\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {count Stud 2007; 12: 623-57. }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[153] Jermakowicz EK, Prather-Kinsey J,
Wulf I. The value relevance of }\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {accounting income reported by DAX-30 German companies.
J Int }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {Financ Manage
Account 2007; 18: 151-91. }\par\pard\li0\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {[154] Niskanen J, Kinnunen J, Kasanen E. The value
relevance of IAS }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{reconciliation components: empirical evidence from Finland. J
Ac-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {count Public
Policy 2000; 19: 119-37. }\par\pard\li0\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {[155] Callen JL, Morel M. The valuation relevance of
R&D expendi-}\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {tures:
Time series evidence. Int Rev Financ Anal 2005; 14: 304-25. }\par\pard\li0\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {[156] Cazavan-Jeny A, Jeanjean T. The
negative impact of R&D capi-}\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {talization: A value relevance approach. Eur Account Rev
61. }\par\pard\li0\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {[157] Hope O-K,
Kang T, Thomas WB, Vasvari F. Pricing and mispric-}\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {ing effects of SFAS 131. J Bus Finance
Account 2008; 35: 281-}\par\pard\li573\ri0\sl-173\slmult0
\fs16\cf0\f0\charscalex100 {306. }\par\pard\li0\ri0\sl-186\slmult0
{[158] Ettredge ML, Soo Young K, Smith DB, Zarowin PA. The
impact }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {of SFAS No.
131 business segment data on the market's ability to }\par\pard\li573\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {anticipate future earnings. Account Rev
{[159] Hossain M. Change in value relevance of quarterly foreign
sales }\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {data of US
multinational corporations after adopting SFAS 131. }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {Rev Quant Finance Account 2008; 30: 1-
23. }\par\pard\li0\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {[160] Lajili K,
Zeghal D. Labor cost voluntary disclosures and firm }\par\pard\li573\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {equity values: Is human capital information
value-relevant? J Int}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{Account Audit Taxat 2005; 14: 121-38. }\par\pard\sect\sectd\sbkpage
{\shp{\*\shpinst\shpleft1253\shptop2893\shpright11560\shpbottom2906\shpfhdr0\shpwr3
\shpwrk0\shpfblwtxt1\shplid2072\shpz0\shpbxpage\shpbypage
2;12;16384;45824;1;45824;1;45824;1;45824;1;45824;24577;32768}}
\i0 \par\pard\li613\ri0\sl-386\slmult0 \fs16\cf0\f0\charscalex100 {[161] Chee Yeow
L, Patricia Mui-Siang T. Value relevance of value-at-}\par\pard\li1186\ri0\sl-
186\slmult0 \fs16\cf0\f0\charscalex100 {risk disclosure. Rev Quant Finance Account
{Lapointe-Antunes P, Cormier D, Magnan M, Gay-Angers S. On
the }\par\pard\li1186\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {relationship
between voluntary disclosure, earnings smoothing and }\par\pard\li1186\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {the value-relevance of earnings: The case
of Switzerland. Eur Ac-}\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {count Rev 2006; 15: 465-505. }\par\pard\li613\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[163] Bangh�j J, Plenborg T. Value
relevance of voluntary disclosure in }\par\pard\li1186\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {the annual report. Account Finance 2008; 48: 159-
80. }\par\column\pard\li1613\ri0\sl-253\slmult0 \fs16\cf0\f0\charscalex100\b \i
\fs16\cf0\f0\charscalex100 {[164] Hassel L, Nilsson H, Nyquist S. The value
relevance of environ-}\par\pard\li573\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100
{mental performance. Eur Account Rev 2005; 14: 41-61. }\par\pard\li0\ri0\sl-
173\slmult0 \fs16\cf0\f0\charscalex100 {[165] Ball R, Robin A, Sadka G. Is
financial reporting shaped by equity }\par\pard\li573\ri0\sl-186\slmult0
\fs16\cf0\f0\charscalex100 {markets or by debt markets? An international study of
timeliness }\par\pard\li573\ri0\sl-173\slmult0 \fs16\cf0\f0\charscalex100 {and
conservatism. Rev Account Stud 2008; 13: 168-205. }\par\pard\li0\ri0\sl-186\slmult0
{.}\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\col
s3\colno1\colw5013\colsr-0\colno2\colw4146\colsr-
{Received: July 31, 2008 }\par\pard\li613\ri0\sl-213\slmult0
\fs18\cf0\par\pard\li613\ri0\sl-186\slmult0 \fs16\cf0\f0\charscalex100 {� Leif Atle
Beisland; Licensee }\fs16\cf0\f0\charscalex100\i {Bentham Open}\i0
\fs16\cf0\f0\charscalex100 {.}\par\column\pard\li0\ri0\sl-213\slmult0
\fs16\cf0\f0\charscalex100 {Revised: December 11,
2008 }\par\column\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-
{Accepted: January 2,
2009 }\par\pard\sect\sectd\sbknone\pgwsxn12240\pghsxn15840\marglsxn666\margrsxn133\
pard\li613\ri0\sl-226\slmult0 \fs16\cf0\f0\charscalex100 {This is an open access
article licensed under the terms of the Creative Commons Attribution Non-Commercial
License (http://crea}\fs16\cf0\f0\charscalex100
{tivecommons.org/licenses/by-}\par\pard\li613\ri0\sl-186\slmult0
\fs14\cf0\f0\charscalex100 {nc/3.0/) which permits unrestricted, non-commercial
use, distribution and reproduction in any medium, provided the work is
prop}\fs14\cf0\f0\charscalex100 {erly cited. }\par}

Intrinsic Value Literature

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Intrinsic Value Literature

Caricato da

Copyright:

Formati disponibili

{\rtf\ansi\deff0\ansicpg1252

Potrebbero piacerti anche