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

“Finally, this is one of the first studies to examine value relevance from the credit as well as equity perspectives because a multi-user perspective can lead to different conclusions and also generate more confident inferences (Holthausen and Watts, 2001).”

“This distinction is relevant as intangibles are basically different in nature from tangible assets, lacking physical substance and being harder to evaluate in terms of current and future profitability (Barth et al., 2001; Gu & Wang, 2005; Holthausen & Watts, 2001).”

“Positive accounting research contributes and has helped in shaping the fair value debate as given by (Barth et al., 2001; Holthausen & Watts, 2001).”

“Accounting standards and practices are influenced by varying needs of different financial information users, including corporate boards’ use of accounting information in performance measurement and compensation (e.g., Ball 2001; Holthausen and Watts 2001; Kothari et al. 2010).”

“This model links the market values of the equity of a firm to its abnormal earnings, net book values, and other information (Barth et al., 2001; Holthausen and Watts, 2001).”

“…finance literature, studies in which an empirical relation between market values (or changes in values) and particular accounting numbers are investigated for the purpose of assessing the use of those numbers in an accounting standard are called value-relevance studies (Holthausen and Watts, 2001).”

“objectives of standard setters can interfere with contracting needs (Holthausen and Watts 2001).”

“Besides these econometric problems Holthausen and Watts (2001), The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting, Journal of Accounting and Economics 31, have shown why 'drawing Standard-Setting inferences is difficult' and not justified by conducting value-relevance tests .”

“They note that given the evidence that many acquisitions fail to add value for acquiring shareholders, much of the goodwill reported is ‘badwill’ and that managers have incentives to fail to recognize these losses on a timely basis (see Holthausen and Watts 2001, Watts 2003).”

“An accounting number can be considered to be value relevant if it is helpful in explaining value or returns over long windows (Holthausen & Watts, 2001).”

“and Holthausen and Watts (2001) suggest that conservatism in accounting has persisted because it alleviates agency problems.”

“Compared with corporate performance, accounting conservatism is a more direct measure of interest conflicts and alignment between shareholders and managers (Holthausen and Watts, 2001; Watts, 2003; Ball and Shivakumar, 2005; Goh and Li, 2011).”

“As financial markets expand and become more complex and accounting standards attempt to keep pace with these changes, it is a challenge for accounting research to make a substantive contribution in addressing questions relevant to standard setting […] (Holthausen and Watts, 2001, p.30).”

“5Note that the balance sheet approach might lead to measurement errors in accrual estimates if mergers and acquisitions, discontinued operations, foreign currency translations, and divestitures occur as examined in Hribar and Collins (2002). They find that this is particularly the case if the aim is to analyze earning…”

“Nonetheless, it is quite plausible to argue that the empirical studies support the assumption that ‘full disclosure’ reduces information asymmetry, and potential insider trading, and increases the credibility and efficiency of financial markets (Holthausen and Watts, 2001; Barth et al., 2001; Kothari, 2001).”

“…in conservatism across firm characteristics (e.g., Khan and Watts 2009; Ramalingegowda and Yu 2012), across time (e.g., Givoly and Hayn 2000; Holthausen and Watts 2001; Sivakumar and Waymire 2003), and across countries (e.g., Pope and Walker 1999; Ball et al. 2000; Ball et al. 2003; Bushman…”

“Value relevance analyses represent an empirical operationalization approach to test the relevance and faithful representation criteria (Barth et al. 2001).”

“Consistent with this, Watts and Zimmerman (1986), Holthausen and Watts (2001), Ball (2001), and Kothari, Ramanna, and Skinner (2010) assert that a primary role of the public disclosure of financial statements is to provide information useful for performance evaluation and stewardship.”

“Holthausen and Watts (2001) reviewed the value relevance of information and its effects on the standard setting.”

“To test this, we first follow Shalev et al. (2013) in computing a ratio of the acquirer CEO’s bonus over total CEO compensation from Execucomp, averaged over the two-year window before the acquisition consummation year.”

“An imperative, albeit understudied, economic role of earnings in capital markets is to provide a benchmark for assessment and/or settlement of contractual agreements (Watts and Zimmerman 1986; Weisbach 1988; Collins and DeAngelo 1990; Holthausen and Watts 2001).”

“Other studies have assessed the association between market values and accounting numbers (Barth et al., 2008; Gelb & Zarowin, 2002; Giosi, Testarmata, & Buscema, 2013; Holthausen & Watts, 2001; Ou & Sepe, 2002).”

“Demand for verifiability of accounting estimates Verifiability is a crucial attribute of accounting information and is concerned with preventing misrepresentation (Holthausen & Watts, 2001).”

“Holthausen and Watts (2001) categorized studies on value relevance into three types: relative association studies, incremental association studies, and marginal information content studies.”

“Holthausen and Watts (2001) used Basu’s surplus- stock return model to test the conservatism of accounting earnings of listed corporations from 1927 to 1993 in the capital market of the United States ,it was found that the accounting earnings in the United States appeared before 1966, and verified…”

“, 2001), and the consideration of accounting information as tool for other stakeholders and not primarily focused on shareholders (Holthausen and Watts, 2001).”

“Extant literature has provided extensive evidence on the firm-level or country-level determinants of accounting conservatism (e.g., Basu, 1997; Holthausen & Watts, 2001; Watts, 2003).”

“Changes in accounting rules from disclosure to recognition can decrease the reliability of accounting information since firm managers are more likely to have incentives to manage reported accounting numbers employing their discretion (Holthausen and Watts, 2001).”

“From the review of value relevance literature Holthausen and Watts (2001) identified 3 categories of studies that adopt association approach in analysing value relevance of accounting numbers namely, relative association, incremental association and marginal information content.”

“1Compare here the distinction between relative and incremental association studies in Holthausen and Watts (2001).”

“A pesar de ello, los académicos parecen poco interesados en cuestiones de base, que permitan desarrollar teorías de la contabilidad o sustenten la normalización contable (Holthausen & Watts, 2001; Moizer, 2009).”

“Accounting has multiple uses and documenting increased usefulness for one use (e.g. valuation) does not tell us anything about its usefulness for other purposes (e.g. contracting) (Holthausen and Watts 2001).”

“Holthausen & Watts (2001) discuss external factors’ ability to influence the relevancy of accounting information.”

“This analysis joins the studies regarding the correlation analysis of Holthausen and Watts (2001) regarding the testing of the existence of any connection between the accounting ratios and stock return using the R2 coefficient of determination, analyzing if the information in the balance sheet has…”

“Over the last couple of decades, a huge number of value relevance studies have been published (Holthausen and Watts, 2001).”

“However, after the creation of the SEC, the content of the balance sheet includes the consideration of regulation and litigation matters (Holthausen and Watts 2001).”

“However, since share price variations have previously been shown to be affected by growth and risk factors (Ettredge et al., 2005; Holthausen & Watts, 2001; Kothari, 2001), enterprise risk was modeled using the ratio of debt to equity and growth using the ratio of market value or total…”

“A large literature on accounting conservatism places low value on soft assets such as goodwill and intangibles on the basis that they cannot be used for contracting purposes and do not contribute to an orderly liquidation of a company (Holthausen & Watts, 2001).”

“Analysis of the standard-setting process from the viewpoints of the owners and debt suppliers is crucial because the information needs differ (Holthausen and Watts 2001).”

“In this sense, there is a great deal of literature on the study of the relevance of financial information (i.e. Barth et al., 2001; Batista & Paulo, 2017; Holthausen & Watts, 2001; Jenkins et al., 2009; Song et al., 2010; Sundgren et al., 2018).”