Coincident and Forecast Relevance of Accounting Numbers

Abstract

Value relevance studies, which examine the relationship between accounting numbers and equity valuation, use market values sampled a number of months after the publication of annual financial reports. Although it stems from the researchers' belief that accounting information needs to be made available before it can be discounted in market prices, this approach disregards a substantial body of literature that proves to the contrary. Our study provides empirical evidence that directly supports the interpretation of value relevance as the ability of accounting numbers to capture value-relevant information that has already been included in market valuation. In order to describe the temporal relationship between accounting-based equity valuation and market value of equity we introduce two new concepts: coincident and forecast relevance of accounting numbers. The first represents the relevance of accounting information for market values sampled during the reporting year, while the latter represents the relevance of accounting numbers for market values sampled after fiscal year-end. We measure coincident and forecast relevance by estimating Ohlson model parameters with country panel regressions for exchange-listed companies from France and Germany. The results confirm that coincident relevance is stronger than forecast relevance in both countries. The findings contribute to the studies on value relevance by suggesting improvements to current research methods.

Keywords: value relevance, financial information, accounting standards, equity valuation, accounting methodology

JEL Classification: M41, G12