eThesis - School of Business electronic theses

This study examines the changes in value relevance of earnings and book values over the last 50 years in the USA. Value relevance refers to the ability of accounting data to explain stock market values or returns. The common claim of the prior research is that the value relevance of earnings has decreased over time, while the value relevance of book values has increased. Researchers have presented several reasons for these changes. The reasons include, firstly, the balance sheet approach pursued by the FASB, and secondly the increasing intangible intensity. Other reasons include the increasing frequency of special items, the growing incidence of negative earnings, the decreasing average firm size as well as the decline in matching over time. The empirical part of the study was conducted using cross-sectional regressions of market value on earnings and book values. The sample consists of U.S. firms listed on NYSE, AMEX and NASDAQ over the sample period of 1964-2013. The results show that the value relevance of earnings, the value relevance of book values, and the combined value relevance of earnings and book values has decreased over time.