On the value relevance argument: Do market participants place a premium on future prospects of the firm?

Abstract

Purpose

Potential investors need information on corporate social issues to choose less risky investments, but the IASB framework excludes corporate social disclosure from financial reporting, and this corroborates Ohlson (1995) and Myers’ (1999) view that financial statements do not provide all domain variables to predict value relevance. The purpose of this study is to ascertain whether market participants place a premium on the future prospect of the firm when making investment decisions, and if they do, then Ohlson and Myers are correct, and this would be glaring evidence to recommend a rethink on the IASB reporting framework.

Design/methodology/approach

Nigeria provides a realistic research setting to detect value relevance attributable to the IFRS because it is less affected by the 2007/2008 financial crisis. The price model was estimated for Nigerian domestic accounting standards and the International Financial Reporting Standards (IFRS). The means for each predictor were plugged into each estimated equation to obtain the average value relevance of each financial reporting system. Then, the IFRS accounting policies were made to play by the rules of the domestic accounting standards. If, in fact, accounting information is the dominant factor that drives value relevance, then equalizing backgrounds should equalize value relevance, otherwise market participants place a premium on the future prospect of the firm.

Findings

The study detects, inter alia, a significant gap even after equalizing backgrounds, suggesting that market participants look beyond the financial statements in forming perceptions on the future prospect of the firm; e.g. relationship with host communities, development stages of new products in their life cycles, etc.

Practical implications

The findings ring a bell for the IASB to include metrics of future prospect of the firm in corporate financial reporting so that investors can choose less risky investment portfolios. Furthermore, the findings lend support to Ohlson and Myers’ argument that financial statements do not provide all domain variables to predict value relevance.

Originality/value

To date, no study has reported the amount of value relevance attributable to the IFRS vis-à-vis domestic accounting standards and future prospect of the firm.

Citation

Avwokeni, A.J. (2018), "On the value relevance argument: Do market participants place a premium on future prospects of the firm?", Journal of Financial Reporting and Accounting, Vol. 16 No. 4, pp. 660-676. https://doi.org/10.1108/JFRA-02-2017-0012