The relevance of the value-relevance literature for financial accounting standard setting

“222), citing Holthausen and Watt's famous ( 2001 ) critique of value-relevance as arguing that ‘this is because value-relevance tests … [are] not backed up by theory and modelling of the underlying links between accounting, standard-setting and value’ (Wyatt, 2008 , p.”

“Second, information can be useful even if it is not value relevant (Holthausen and Watts 2001).”

“…including loss of borrower’s reputation in debt markets (Ahmed et al. 2002, Nikolaev 2010), increase in litigation risks (Basu 1997, Qiang 2007, Chung and Wynn 2008, Khan and Watts 2009), and higher auditor pressure and audit fees (Basu 1997, Holthausen and Watts 2001, DeFond et al. 2015).”

“…studies have not only examined a limited number of financial reporting choice (e.g., accruals) often with mixed results (e.g., Dechow et al., 2010; Holthausen & Watts, 2001; Kothari, 2001; Verrecchia, 2001), but also mainly focused on developed countries (e.g., UK and US), and thereby arguably…”

“These studies are similar in spirit to the association studies of long term returns and accounting information, but examine to what extent the firm price can be explained by a set of core financial reporting numbers (Barth et al. 2001).”

“Prior research has provided evidence of the linkages between borrower financial reporting choices and debt contracting (see surveys by Holthausen and Watts, 2001; Fields, Lys, and Vincent, 2001; and a discussion by Sloan, 2001).”

“…Ruch and Taylor 2015) and that it varies predictably with various drivers of conservatism (Watts 2003a), such as litigation exposure (Basu 1997; Holthausen and Watts 2001; Qiang 2007; Chung and Wynn 2008), country and industry characteristics (Pope and Walker 1999; Ball et al. 2000, 2008;…”

“The likelihood of opportunistic behaviour arises because the measurement of goodwill requires numerous estimates of fair values when assigning the purchase price to identifiable net assets (Holthausen and Watts 2001; Ramanna 2008).”

“Holthausen and Watts’s (2001) group association studies into two:”

“This relationship holds as intangible assets have higher asymmetric information and also a lesser amount of collateral value, imposing some restrictions on debt financing and declining the borrowing capacity of the company (e.g., Holthausen and Watts 2001).”

“Holthausen and Watts (2001) distinguish three types of research on Value relevance that associate accounting information with the market value of equities, including relative association studies.”

“Thereafter, a significant body of research has been conducted in the context of different markets (e.g., Amir, Harris, &Venuti, 1993; Collins, Maydew, & Weiss, 1997; Holthausena & Watts, 2001; Brimble & Hodgson, 2007; Soderstrom & Sun, 2007).”

“This caused information asymmetry that could badly affect firm’s value and arise agency problem (Holthausen & Watts, 2001).”

“See Barth, Beaver, and Landsman 2001; Fields, Lys, and Vincent 2001; Healy and Palepu 2001; Holthausen and Watts 2001; Kothari 2001; and Verrecchia 2001.”

“Literature questions the assumption of a linear function in value relevance studies (Barth et al. 2001b; Holthausen and Watts 2001).”

“According to Holthausen and Watts (2001), standard-setting and two theories of accounting are applied by value relevance studies to make conclusions: (i) “inputs-to equity-valuation” theory and (ii) “direct valuation.””

“São utilizados primordialmente para avaliar mudanças em normas e padrões contábeis aplicados, em uma região, e como essas modificações impactam o mercado de capitais (Holthausen & Watts, 2001).”

“If lenders primarily contract under GAAP as suggested, for example, by Holthausen and Watts (2001); Watts (2003); and Ball, Bushman, and Vasvari (2008), then the classification of MRPS as debt following SFAS 150 can be expected to increase book leverage ratios and reduce income and cash flows from…”

“1 Watts (2003a) and Holthausen and Watts (2001) argue that conservatism persists because it helps to address agency problems.”

“Although these study results provide evidence around the value relevance of deferred taxes, Holthausen and Watts (2001) and also Kothari and Shanken (2003) point to theoretical and econometric issues around the use of price level models in these studies.”

“Traditionally, value is defined as equity value and thus value relevance is the usefulness of accounting and non-accounting information for equity valuation (Barth et al. 2001; Holthausen and Watts 2001; Wyatt 2008).”

“Value relevance studies have been categorised into three classifications by Holthausen and Watts (2001).”

“Similarly, in the value relevance literature (see Holthausen and Watts, 2001; Barth et al., 2001), a firm’s stock price is the normative benchmark for fundamental value and the value relevance of accounting-based metrics is judged on the basis of their ability to explain either cross-sectional…”

“Consistent with this lack of verifiability, Ramanna and Watts (2011) and Holthausen and Watts (2001) argue that goodwill is prone to managerial discretion, both at inception and at the time of its subsequent impairment.”

“Hu and Zhang (2011) extend LaFond and Watts (2008) by using Basu (1997) model to capture accounting conservatism and firm-specific return volatility to proxy for informed capital market.”

“economic demand for verifiable and timely information that mitigates agency problems in contracting, and in response to changes in the regulatory and litigation environments (Holthausen and Watts, 2001; Watts, 2003).”

“The financial reporting system as a risk cycle Hood et al. (2001) utilise cybernetic ideas to construct a framework for the comparative analysis of what they call risk regulatory ‘regimes’ (RRRs).”

“Nonetheless, fair value for goodwill is highly subjective, difficult to verify, and susceptible to managerial opportunism (Holthausen and Watts, 2001; Watts, 2003).”

“Accounting conservatism is the verification difference between gain and loss recognition, resulting in the persistent understatement of the reported net asset value (Basu, 1997; Holthausen & Watts, 2001; LaFond & Watts, 2008).”

“2 Verifiability is the ability through consensus among measures to ensure that information represents what it purports to represent or that the chosen measurement method has been used without error or bias (Holthausen and Watts, 2001).”

“10 See the controversial debate about normative implications from positive findings surrounding valuerelevance research in Barth et al. 2001, Holthausen and Watts 2001; see also Fülbier et al. (2009) about this.”

“Accounting information will be considered to have a value relevance when stock prices fluctuate due to the report [20].”

“We chose to use the Ohlson price model for two reasons: firstly, because it is considered the best stock valuation model on financial markets [22] and, secondly, because it includes the book value of equity that could cross-sectionally proxy for net assets value and has the potential to reduce the correlated omitted v…”

“Ohlson (1995) predicts δ1 > 0 and δ2 > 0, and this prediction is supported empirically by prior research (e.g., Barth et al. 1996, 1998, 2001).”

“According to Holthausen and Watts (2005) , certain authors tested the relevance of accounting information without any specific interest for the characteristics of the market on which the share price is formed while other authors have proven that studies on relevance must be based upon semi-strong market efficiency so…”

“To date, there has been ample literature on the value relevance of goodwill (D’Arcy & Tarca, 2018; Holthausen & Watts, 2001) and on its value manipulation (Holthausen & Watts, 2001; Wallace, 2000).”

“The second group is formed by those proxies that measure investors’ reactions to reported earnings, basing upon the idea that higher quality earnings provide useful information for equity valuation (Dechow et al., 2010; Holthausen and Watts, 2001).”

“Holthausen and Watts (2001) classify value relevance studies in three categories, and any individual study may be in more than one of them: (i) “Relative association studies”, which, like this present study, compare the association between the market value of shares (or changes in those values) and…”