Financial Reporting and Firm Valuation: Relevance Lost or Relevance Regained?

July 10, 2013 Leave a comment

Financial Reporting and Firm Valuation: Relevance Lost or Relevance Regained?

Luzi Hail University of Pennsylvania – The Wharton School

June 19, 2013
Accounting and Business Research, Vol. 43, No. 4, pp. 329-358, 2013

Abstract: 
In this study, I examine whether balance sheet and income statement numbers have lost or regained their relevance over the last 30 years. Institutional and macroeconomic factors like the global trend towards strengthening regulation and harmonizing financial reporting, the extended use of fair values over historical cost, and the recurring occurrence of accounting scandals, market bubbles, and financial crises make it likely that the role of financial reporting for firm valuation has changed. Following prior research, I estimate four models for the concurrent relation between market value and accounting numbers, and then examine the pattern in explanatory power over time. I find that the loss in relevance of the income statement continues in recent years and is present in a large international sample, in particular in countries with strong institutions. While the overall relevance of the balance sheet remains stable, I find a downward trend during the first sample half, which reverses in the second half, especially in common law countries with strong investor protection, strict disclosure requirements, and integrated markets. Even though several caveats apply, the results suggest that changes in the economy, the institutional environment, and in how firms operate affect the relative importance of accounting information for the use in firm valuation by outside stakeholders.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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