5. Conclusion
This study investigates the popular claim that financial accounting
information has become less value relevant over time, specifically over
the period 1952-94. Our analyses show that returns to perfect foresight
trading strategies based on the sign and magnitude of earnings, on the
level and change in earnings and book values, and on an assortment of
fundamental signals have decreased over our sample period. However,
returns based on cash flows and (just) the sign of earnings have not
changed significantly over time. Our tests indicate that the explanatory
power of earnings levels and changes for returns has significantly decreased
over time. In contrast, our test of the explanatory power of book
values of assets and liabilities (alone or combined with earnings) for
market equity values provides no evidence of a decline in the explained
variability of the balance sheet relation or the book value and earnings
relation-in fact, we usually find the opposite.
To the extent our statistical tests favor the null hypothesis of no change
in relevance (so failure to reject the null may be driven by low power),
.greater weight should be placed on results which reject this hypothesis.
These results include declines in the returns to several of the accountingbased
hedge portfolios, a decline in the ability of earnings to explain returns,
and increases in the ability of assets and liabilities, and earnings
and book values, to explain market equity values. Overall, we interpret
our results as providing mixed evidence on whether financial reports
have lost relevance over the 1952-94 period.
Because claims of decreased value relevance are often phrased in a way
which implies that the decrease should be greatest for high-technology
stocks, and because of the increased numbers of these firms over our sample
period, we repeat the first and second analyses for subsamples of firms
in high-technology industries and compare the results to those obtained
for firms in low-technology industries. Results for these two samples are
similar to the findings for the full sample, suggesting that high-technology
firms have not experienced a greater decline in relevance than lowtechnology
firms. We infer from these results that even though certain
types of assets are not included in the current accounting model, and
current GAAP requires expensing not capitalization of certain expenditures
expected to yield future benefits, reported earnings continue to
summarize value-relevant corporate activities to approximately the same
extent for both high-technology and low-technology firms.
Our tests do not rely on assumptions about whether market agents fully
extract all the information available in financial statements, just that
there have been no systematic differences in this behavior over time. Our
tests also do not speak to the question of whether the level of value relevance
in financial statement information is undesirably low. Rather the
results bear only on the question of whether there has been a change in
value relevance. Thus, our results have no implications for whether resources
should be devoted to changing the financial reporting model nor
do our tests shed any light on which specific pieces of financial statement
information-other than earnings, cash flows, assets, and liabilities-are
used, by which investors, and how.28
While our tests are not designed to comment on the source of any
changes in value relevance, future work could examine possible explanations
for documented changes and, in doing so, develop more powerful
tests of changes in the value relevance of financial reports. Analyses exploring
other interpretations of value relevance (such as those described in section 2) would also add to our understanding of the decision usefulness
of financial statements to investors.29