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Disclosure-Derived Financial Statement Adjustments in Equity Valuation

Author

Listed:
  • George Batta

    (Robert Day School of Economics and Finance, 500 E. Ninth St., Claremont, California 91711, US)

  • Ananda Ganguly

    (Robert Day School of Economics and Finance, 500 E. Ninth St., Claremont, California 91711, US)

  • Joshua George Rosett

    (Claremont McKenna College, Robert Day School of Economics and Finance, 500 E. Ninth St., Claremont, California 91711, US)

Abstract

In this paper, we assess the equity value relevance of disclosure-derived financial statement adjustments. In price levels and returns tests, we find that reported financial numbers have relatively superior explanatory power over adjusted numbers. Only when adjustments are included along with reported numbers in pricing regressions do adjustments retain significant explanatory power. Our results suggest that for summary valuation inputs like operating profitability, assets, and liabilities, analysts should not substitute adjusted numbers for reported numbers; rather, the information in a subset of adjustments should be used along with reported numbers to produce more accurate valuations.

Suggested Citation

  • George Batta & Ananda Ganguly & Joshua George Rosett, 2014. "Disclosure-Derived Financial Statement Adjustments in Equity Valuation," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-39.
    • Handle: RePEc:wsi:rpbfmp:v:17:y:2014:i:02:n:s0219091514500088
    DOI: 10.1142/S0219091514500088
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    References listed on IDEAS

    as
    1. Choi, Hwan-sik & Kiefer, Nicholas M., 2006. "Robust Model Selection in Dynamic Models with an Application to Comparing Predictive Accuracy," Working Papers 06-09, Cornell University, Center for Analytic Economics.
    2. George Batta & Ananda Ganguly & Joshua Rosett, 2014. "Financial statement recasting and credit risk assessment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 47-82, March.
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    Cited by:

    1. Ali Nejadmalayeri & Sheri Faircloth & Jeanne Wendel & Surya Chelikani, 2017. "GASB mandatory disclosure rules and municipal bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 379-405, August.

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    More about this item

    Keywords

    Financial analysis; equity valuation; value relevance; recognition vs. disclosure; disclosure reliability;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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