Sins of Omission in Value Relevance Empirical Studies

Onali, Enrico and Ginesti, Gianluca (2015): Sins of Omission in Value Relevance Empirical Studies.

Abstract

We contribute to the value relevance literature by investigating critical methodological deficiencies emerged in past and current empirical research. Using Monte Carlo simulations calibrated on the basis of the statistical properties of market and accounting data for a large sample of European listed companies, we are the first to document and quantify the effects of neglecting the lag of stock price as an explanatory variable in the conventional approach for estimating price level regressions. We demonstrate that for European listed companies this is an important source of omitted variable bias and the extent of such bias increases as the autocorrelation coefficient for stock price and the explanatory variables increases. We show that using alternative specifications which deflate the accounting variables by the lag of stock price, commonly employed in the accounting literature, can lead to high over-rejection rates. Our findings are relevant for the interpretation of most of the empirical studies on the impact of IFRS on value relevance in Europe.

• Item Type: MPRA Paper
• Language: English
• Keywords: Value relevance; Linear Information Model; IFRS; Monte Carlo simulations; Price Regression Mode; Panel data models
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; G - Financial Economics > G1 - General Financial Markets

References

Aboody, D., Hughes, J., Liu, J., 2002. Measuring Value Relevance in a (Possibly) Inefficient Market. Journal of Accounting Research (40), 965-986.

Agostino, M., Drago, D., Silipo, D.B., 2011.The value relevance of IFRS in the European banking industry. Review of Quantitative Finance and Accounting 36 (3), 437-457.

Aharony, J., Barniv, R., Falk, H., 2010. The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU. European Accounting Review 19 (3), 535-578.

Ali, A., Hwang, L.S., 2000. Country-Specific Factors Related to Financial Reporting and the Value Relevance of Accounting Data. Journal of Accounting Research 38 (1), 1-21.

Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58, 277-97.

Arellano, M., Bover, O., 1995. Another look at the instrumental variable estimation of error-components models. Journal of Econometrics 68, 29-51.

Barth, M.E., Clinch, G., 2009. Scale Effects in Capital Markets-Based Accounting Research. Journal of Business Finance & Accounting 36 (3) & (4), 253-288.

Barth, M.E., Kallapur, S., 1996. The effects of cross-sectional scale differences on regression results in empirical accounting research. Contemporary Accounting Research 13 (2), 527-567.

Barth, M.E., Landsman, W.R., Lang, M.H., 2008. International Accounting Standards and accounting quality. Journal of Accounting Research 46 (3), 467-498.

Barth, M.E., Landsman, W.R., Lang, M.H, Williams, C., 2012. Are IFRS-Based and US GAAP-Based Accounting Amounts Comparable? Journal of Accounting and Economics 54, 68-93.

Barth, M.E., Landsman, W.R, Young, D., Zhuang, Z., 2014. Relevance of Differences between Net Income based on IFRS and Domestic Standards for European Firms. Journal of Business Finance & Accounting, 41 (3) & (4), 297-327.

Beaver, W.H., McAnally, M.L., Stinson, C.H., 1997. The information content of earnings and prices: A simultaneous equations approach. Journal of Accounting and Economics 23, 53-81.

Bernard, V.L., 1995. The Feltham-Ohlson framework: Implications for empiricists. Contemporary Accounting Research 11 (2), 733-747.

Bhargava, A., 2010. An econometric analysis of dividends and share repurchases by US firms. Journal of the Royal Statistical Society A 173 (3), 631-656.

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115-43.

Bond, S., 2002. Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice. The Institute for Fiscal Studies, CWP 09/02.

Christensen, H.B., Hail, L., Leuz, C., 2013. Mandatory IFRS Reporting and Changes in Enforcement. Journal of Accounting and Economics 56, 147-177.

Collins, D.W., Maydew, E.L., Weiss, I.S., 1997. Changes in the value-relevance of earnings and book values over the past forty years. Journal of Accounting and Economics 24, 39-67.

Deadman, E., Mouselli, S., Shen, Y., Stark, A.W., 2009. Accounting, Intangible Assets, Stock Market Activity, and Measurement and Disclosure Policy – Views From the U.K. Abacus 45 (3), 312-341.

Dechow, P.M., Hutton, A.P., Sloan, R.G., 1999. An empirical assessment of the residual income valuation model. Journal of Accounting and Economics 26 (1-3), 1-34.

Devalle, A., Onali, E., Magarini, R., 2010. Assessing the value relevance of accounting data after the introduction of IFRS in Europe. Journal of International Financial Management & Accounting 21 (2), 85-119.

Easton, P., 1998. Discussion of ‘Revalued financial, tangible, and intangible assets: association with share prices and non-market-based value estimates’, Journal of Accounting Research 36 (Supplement), 235-247.

Feltham, G., Ohlson J., 1995. Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 689-731.

Gjerde, Ø., Knivsfla, K., Sættem, F., 2008. The Value-Relevance of Adopting IFRS: Evidence from 145 NGAAP Restatements. Journal of International Accounting, Auditing and Taxation 17, 92-112.

Hellström, K., 2006. The value relevance of financial accounting information in a transition economy: the case of Czech Republic. European Accounting Review 15 (3), 325-349.

Holthausen, R.W., Watts, R.L., 2001. The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31, 3-75.

Horton, J., Serafeim, G., 2010. Market Reaction to and Valuation of IFRS Reconciliation Adjustments: First evidence from the UK. Review of Accounting Studies 15, 725-751.

Hung, M., Subramanyam, K., 2007. Financial Statement Effects of Adopting International Accounting Standards: The case of Germany. Review of Accounting Studies 12, 623-657.

ICAEW, 2014. The Effects of Mandatory IFRS Adoption in the EU: A Review of Empirical Research. Institute of Chartered Accountants in England and Wales (ICAEW), October.

Kothari, S.P., Zimmerman, J., 1995. Price and Return Models. Journal of Accounting and Economics, 20 (2), 155-92.

Lev, B., 1989. On the usefulness of earnings: Lessons and directions from two decades of empirical research. Journal of Accounting Research 27 (Supplement), 153-192.

Morais, A.I., Curto, J.D., 2009. Mandatory adoption of IASB standards: value relevance and country-specific factors’. Australian Accounting Review 19, 128-143.

Nickell, S., 1981. Biases in dynamic models with fixed effects. Econometrica 49, 1417-1426.

Ohlson, J., 1995. Earnings, book values and dividends in equity valuation. Contemporary Accounting Research 11, 661-687.

Roodman, D., 2006. How to do xtabond2: an introduction to “difference” and “system” GMM in Stata. Center for Global Development, WP No. 103.

Roodman, D., 2009. A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135-58.

Stock, J.H., Watson, M.W., 2008. Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression. Econometrica 76 (1), 155-174.

Veith, S., Werner, J.R., 2014. Comparative Value Relevance Studies: Country Differences Versus Specification Effects. The International Journal of Accounting 49, 301-330.

Windmeijer, F., 2005. A finite sample correction for the variance of linear two-step GMM estimators. Journal of Econometrics 126, 25-51.