The studies testing changes of value relevance across time contribute to understanding whether the existing financial reporting models are adequate to report the company performance in the dynamic technological, socio-economical and regulatory environment. Further, the results may contribute to management of companies to refine the corporate reporting models.
The changes in the value relevance of earnings and book values over the past forty years were investigated by Collins et al. (1997), who found that the combined value relevance of earnings and book values had not declined over the past 40 years and, in fact, had increased slightly. Further, Collins et al. (1997) claims that the value relevance of
„bottom-line‟ earnings had declined over time, being replaced by an increased value- relevance of book values.
Francis and Schipper (1999) addressed the concern that financial statements have lost a significant portion of their relevance to investors. Their paper has implications for those who are concerned about the current financial reporting model. Their goal was to discuss and test some of the empirical implications of the claim that financial statements have lost their relevance over time. Results indicate that for some financial statement metrics there has been a statistically significant decline in value relevance. Francis and Schipper (1999) observed a significant decline in returns to three of the five accounting based hedged portfolios. Results also report that value relevance has decreased.
Further, the results indicate a distinct decrease (increase) in adjusted R2 from the earnings relation (balance sheet relation) and less obvious upwards trend in the adjusted R2 from the book value and earnings relation. Findings include declines in the returns to several accounting-based hedge portfolios, a decline in the ability of earnings to explain returns, and increases in the ability of assets and liabilities, and earnings and book values. Further, results suggest that high technology firms have not experienced a greater decline in relevance than low-technology firms. Overall, the results are interpreted as providing mixed evidence on whether financial reports lost relevance over the time period 1952-1994.
Francis and Schipper (1999) considered the „market adjusted returns‟ rather than share prices or returns to test the value relevance. Firstly, it is interesting to see the results by considering the relationship between stock returns and earnings and/or book values for
the same sample. Secondly, the sample years are from 1952 to 1994. The context of the financial reporting such as market conditions and regulatory requirements may have changed during this long period of time. These changes also have to be taken into account prior to conclude. Thirdly, the number of securities in the annual regressions range from 377 in 1952 to nearly 4500 in 1994. This wide range of sample size may also have an impact on the final results. Results of this research are contradicted by other findings. As such, it is not appropriate to conclude the „lost of value relevance of financial statements‟ without implementing further tests by considering those factors.
Findings of Kadri et al. (2009) provide evidence that the adoption of IFRS leads to a decrease in the value relevance in earnings and an increase in the value relevance of book value in Malaysian companies. The study reported that the changes in the financial reporting regime significantly affect the value relevance of book value but not earnings. Further, the findings showed while book value and earnings are value relevant during the MASB (Malaysian Accounting Standards Board) period, only book value is value relevant in IFRS period. However, a study by Kadri et al. (2009) investigated the value relevance of accounting information of the post-IFRS period compared to the pre-IFRS period in the UK, Netherlands, Germany and France. The Findings indicated an overall increase in the value relevance of accounting information in post-IFRS period. However, the study further reported the magnitude of the change is not the same for all countries. Similarly, a study by Lode and Napier (2010) investigated the value relevance of pension accounting disclosures under UK GAAP and IFRS. They found, that the disclosure of aggregated pension cost components and disaggregated pension assets and liabilities are more informative under IFRS than UK GAAP. Further, Tsoligkas and Tsalavoutasb (2010) argued that transition of IFRS have implications on the valuation
of R&D expenditure in the UK. They claimed that the capitalised portion of R&D is significantly and positively related to market values, while R&D is significantly and negatively related to market values under IFRS. This supports the proposition that expensed R&D reflects no future economic benefits and thus they should be expensed.
Goodwin and Ahmad (2006) examined whether the value relevance had declined over time in Australia using a large sample of about 13,000 firm-year observations beginning from 1975. In particular, this study investigated whether or not capitalisation of intangibles such as R&D, deferred costs and other intangibles had an effect on longitudinal value relevance. This was studied under a relatively unregulated reporting regime for intangibles. Under this reporting regime, firms have recognised intangible assets, both acquired and internally generated, at cost or value, and employed different accounting practices after initial recognition.
Results suggest that earnings value relevance (measured by R2 and ERC) had declined over this period. After removing losses, the evidence on declining earnings value relevance is weak. Results from estimating a level model also provide no evidence that the value relevance of financial statement information has declined. Further examination of intangible capitalising firms reveals that for these firms, earnings value relevance has increased more compared with firms which did not capitalise intangibles. The value relevance of earnings and book value has increased for capitalisers and there is no significant improvement for non-capitalisers. Furthermore, the value relevance of profitable capitalisers has considerably improved over time, while there is evidence of declining value relevance for profitable non-capitalisers. Further specification tests that control for firm size, firm risk and growth option have not altered the above findings
materially. Goodwin and Ahmad (2006) finally report, „an unresolved question is whether the arrest of declining earnings value relevance is only due to the intangible accounting practised in Australia, since there were groups of non-capitalisers that have little change in earnings value relevance‟.
Brimble (2007) examined whether the relevance of conventional (earnings focussed) accounting information for valuation has declined in Australia over a recent period of 28 years, and suggested that any conclusion that conventional accounting earnings have lost their relevance in Australia is premature. The financial world is simply more complex, and the core value-relevance of conventional accounting earnings has not declined over time.
The evidence of declined value relevance of financial information across time, example, Francis and Schipper (1999), Goodwin and Ahmad (2006); suggest that traditional financial statements do not adequately reflect the real value creating activities of companies with technological developments. Further, failure to recognise the vast majority of internally generated intangible assets as well as the adoption of IFRS may cause value relevance to decline. However, the findings of more recent studies, for example, Kontopoulos et al. (2010); Lode and Napier (2010); and Tsoligkas and Tsalavoutasb (2010) provide evidence that the adoption of IFRS does not cause any decline in the value relevance of financial information.