Value Relevance

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Some value relevance research studies are motivated by standard setting and seek to draw some standard setting inferences from these studies. Their studies are based on theories of accounting, standard setting and valuation.

Question: Are these theories that underlie value relevance studies descriptive of standards setting and valuation? If they are not, then the associations between accounting numbers and equity valuations are just mere associations and have limited standard setting inferences.

The authors then seek to introduce value relevance studies
Literature contains papers that investigate the empirical relations between stock market values and particular accounting numbers
- Purpose: assess or providing a basis
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- But these guys quote FASB statements to motivate their tests but end up their research is inconsistent with those statements. It 's because of 3 assumptions made by value-relevance.

1) Users and uses of financial reporting - Assumption: equity investors are main users of FR and therefore valuation of equity is the dominant use of FR.
REALITY (smacks em in the face): FASB suggests that they give considerable weight to non equity investment users. Valuation is therefore not the dominant function of financial statements. There is a more stakeholder oriented way of looking at things rather than just equity investors.

FASB: General purpose statements that provide inputs to a range of different decisions that have generally similar but not identical information demands such as creditors (liquidity assessment) and management stewardship.

Implications on VR studies: too narrow. Perhaps relevance of number to say lenders might be different from that of equity investors e.g. value of future growth options relevant to equity investors, lenders don 't care. They just want their money back. Therefore, should not use equity values only.

2) Stock prices adequately represent equity investor 's use of information in valuing equity securities.

VR literature: stock price is used to assess investors ' use of FR information because those prices represent the aggregation of individual investors valuations of the firm and info the valuation is based.

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