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Differential Changes In The Value-Relevance Of Earnings And Book Values Over Time: Financial Versus Other Industries

Author

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  • Sharad Asthana

    (The University of Texas at San Antonio)

  • Lucy Huajing Chen

    (Arizona State University)

Abstract

We investigate the change in the value-relevance of earnings and book value information in the financial industry compared to other industries from 1970 to 2005. Prior literature provides mixed evidence as to whether value-relevance reduces over time. Using Ohlson’s model, we find increasing value-relevance for earnings and book value for the financial and other industries. However, the increasing trend is less evident for financial firms. More importantly, we document that the slower growth trend for the financial industry improves compared to other industries after firms adopt SFAS 133 (as amended by SFAS 137 and 138) in 2001. Financial institutions typically hold more derivative instruments and hedging portfolios than other industries. Our results are thus consistent with the view that SFAS 133 may help financial institutions improve the value-relevance of accounting information. Our results have implication for policy makers when they evaluate the benefit of SFAS 133.

Suggested Citation

  • Sharad Asthana & Lucy Huajing Chen, 2007. "Differential Changes In The Value-Relevance Of Earnings And Book Values Over Time: Financial Versus Other Industries," Working Papers 0026, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0064acc
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    File URL: http://interim.business.utsa.edu/wps/acc/0026ACC-501-2007.pdf
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    References listed on IDEAS

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    1. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    2. Khurana, Inder K. & Kim, Myung-Sun, 2003. "Relative value relevance of historical cost vs. fair value: Evidence from bank holding companies," Journal of Accounting and Public Policy, Elsevier, vol. 22(1), pages 19-42.
    3. Wayne R. Landsman & Edward L. Maydew, 2002. "Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 797-808, June.
    4. Francis, J & Schipper, K, 1999. "Have financial statements lost their relevance?," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 319-352.
    5. Ely, K & Waymire, G, 1999. "Accounting standard-setting organizations and earnings relevance: Longitudinal evidence from NYSE common stocks, 1927-93," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 293-317.
    6. Barth, ME & Elliott, JA & Finn, MW, 1999. "Market rewards associated with patterns of increasing earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 387-413.
    7. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 77-104, September.
    8. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 353-385.
    9. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
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    Cited by:

    1. Carmen- Alexandra BALTARIU, 2015. "The Current State Of Knowledge In The Value Relevance Research Field," SEA - Practical Application of Science, Romanian Foundation for Business Intelligence, Editorial Department, issue 7, pages 13-20, April.

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    More about this item

    Keywords

    Value-relevance; accounting information; comparative change; SFAS 133; financial industry; non-financial industry.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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