Financial accounting information and the relevance/irrelevance issue

Abstract

Some current research conclude that the numbers in financial statement are not relevant for three basic reasons. The numbers: (1) are not isomorphic1 with capital market values, (2) do not have a future orientation, and (3) are uninterpretable since they are based upon five different measurement attributes. The lack of isomorphism argument is invalid since actual current performance is not identical with the capital market expectations of future performance. The lack of a future orientation argument is invalid since financial statements capture what has happened and not what is expected to happen. Since a single measurement attribute is required to pr&ce meanin@ measures, the uninterpretability argument holds. A unique measurement attribute is identified in this paper to address this problem

Asset-based recognition criteria: a comprehensive view

“…One of the arguments in favour of a mixed measurement approach is that it is “flexible in that the mix of historical cost and current value can be changed, as accounting thought develops and markets evolve”. Salvary and College (2003) conclude that the numbers in financial statements are not relevant for being based on five different attributed measurement methods (Table IV), but according to Cooper (2007b), mixed measurement is not necessarily a problem if there is more of a focus on “comprehensive income” (Section 3.3). An implication is that the use of current value is likely to become more prevalent with the growth and development of more sophisticated markets (Bence and Fry, 2004, p. 10).…”

Post-acquisition profitability of banks: a comparison of domestic and cross-border acquisitions in the European Union

“…The use of accounting-based data as a basis of measuring firm performance is quite common (Thanos and Papadakis, 2012;Salvary, 2003). While some studies have judged performance based on the stock market reaction around the announcement date of the merger, others have hinged judgement on the returns accruable to the investors.…”

Is a Little Sunshine all We Need? On the Impact of Sunshine Regulation on Profits, Productivity and Prices in the Dutch Drinking Water Sector

“…In our particular application, we need to account for outlying observations as these could arise from (1) measurement errors, (2) the impact of mergers or (3) wrongly estimated values due to particular accounting rules. Indeed, as annual accounts are not particularly designed for economic analysis, the (industrial economics) literature argues that one should account for this by carefully constructing appropriate input variables (e.g., Taylor 1999;Salvary 2003). The influence of any such atypical observations is reduced by order-m estimation.…”

“…Firstly, by implementing robust order-m efficiency estimates (Cazals et al 2002) we employ a DEA model which should reduce the influence of atypical observations. The latter could arise from (1) measurement errors, (2) the various mergers in the sector or (3) wrongly estimated values due to the use of data that adheres to accounting rules (e.g., Taylor 1999;Salvary 2003). Secondly, we employ Daraio and Simar (2007) approach to further extend the robust order-m model to incorporate heterogeneity in the efficiency analysis.…”