Brown, Lo and Lys (1999)

Brown, Lo and Lys (1999) claim value relevance of accounting numbers are in fact declining for the past 4 decades. This claim is contradicting the results of studies done by Collins et al. 1997 whereby the value relevance of accounting numbers are increasing and decreasing over the years.

Brown et al. (1999) suspected that the increase or decrease is due to the effect of scale. They tested the association between market value and scale. They concluded that the increase or decrease in value relevance of accounting numbers is affected by the interaction between the coefficient of scale and book value and earnings that resulted in increase or decrease in value relevance of accounting numbers measured by R2.

(To be continued)

Ball and Brown, 1968

Ball and Brown (1968) work is very important to be understood by researchers in equity valuation. At the time the study was done, there were claims that earnings figure was not accurate and therefore not relevant in equity valuation. In response to these claims, Ball and Brown conducted a study to obtain evidence that in fact earnings information is very useful and contain information to explain market value.

They used the following valuation model:

PRjm=(Pjm+1 + djm)/Pjm,

where, PRjm is relative monthly price of firm j at month m, Pjm is opening price of firm j of month m, djm is dividend of firm j at month m and Pjm is closing price of firm j at month m.