Relevance? Jennifer Francis and Katherine Schipper Journal of Accounting Research vol. 37, no. 2 (Autumn 1999):319352 The authors explore the concern that financial statements no longer have the same relevance to investors that they had in the past. They test for value relevance by measuring the total return that could have been earned from prior knowledge of financial statement information and by examining the explanatory power of accounting information on market values and annual market-adjusted returns. Both analyses are applied to a broad sample of exchange-listed and Nasdaq firms for the 195294 period. The authors find mixed evidence on value relevance of financial statement reporting during the test period.
Francis and Schipper test the empirical implications of the largely
anecdotal claims that financial statement reporting has lost its relevance. They measure the value of current reporting practice in two ways: (1) by measuring the total return that could have been earned with prior knowledge of financial statement information and (2) by measuring the explanatory power of financial statement information for determining annual market-adjusted returns and market values. Francis and Schipper examine the ability of earnings to explain annual market-adjusted returns and the ability of earnings and the book values of assets and liabilities to explain market values of equity. A decrease in explanatory power over time for either measure would indicate a loss of value relevance in financial reporting. The test sample is a broad selection of exchange-listed and Nasdaq firms from 1952 to 1994.
Jennifer Francis and Katherine Schipper are at Duke University. The
summary was prepared by Kathryn Dixon Jost, CFA, AIMR. 2000, Association for Investment Management and Research
Accounting and Regulatory Issues 9
Francis and Schipper also consider the possibility that a loss in
value relevance is attributable to the relative increase in importance and domination of high-technology firms. A frequent criticism of current financial reporting is its lack of applicability to the hightech industry; current financial reporting practices are charged with being out of date with the industry. Francis and Schipper test this concern by repeating the analyses on two subsamples of firms: high-tech firms (such as pharmaceuticals, computers, and telecommunications) and firms in industries that have experienced little technological innovation (such as railroads, grocery stores, and wood and paper products). Over the sample period, Francis and Schipper find mixed results. The evidence shows a decline in the relevance of earnings information but an increase in the relevance of balance sheet informationthe book value of assets and liabilities. These results are largely consistent with other research that has examined the value relevance of financial statement reporting. The data also suggest that no difference exists in the value relevance of financial statement information between high- and low-technology companies. Keywords: Financial Statement Analysis: accounting and financial reporting issues