Does an End of Period's Accounting Variable Assessed have Relevance for the Particular Period?
Paper presented in the 3rd Conference on Financial Markets and Corporate Governance organised by La Trobe University, Melbourne, Australia on 12th and 13th April 2012.
22 Pages Posted: 6 Jun 2009 Last revised: 14 Dec 2012
Date Written: June 6, 2009
Abstract
Ohlson (1995) indicates how a firm’s current earnings can be a proxy for its future earnings potential in the equity valuation model. It is notable that equity price – earnings relationship in value relevance studies explores the relevance of earnings to indicate a firm’s future earnings, not the relevance for a particular period’s earnings. This explanation provides three scenarios how empirical explanations are related to consider current earnings as a proxy for future earnings, not as a periodic measure as a whole, in empirical models. This proxy role of current earnings possibly implies that a particular period’s earnings, on a stand-alone-basis, explain not only the end of period’s price but also subsequent periods’ equity prices. Further, assessing relevance of a periodic accounting variable in the same (periodic) context is important in modelling, if the accounting practice for the accounting variable needs empirical clarification or justification in relation to equity price.
Keywords: Corporate Governance, Accounting, Earnings, Equity price, Price Change, Value Relevance
JEL Classification: G12, M41
Suggested Citation: Suggested Citation
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