It is worthwhile commenting here on the relevance of the value relevance literature for
financial accounting standard-setting. Opposing views are presented in the recent US
review papers by Holthausen and Watts (2001) and Barth et al. (2001). The former argue
that the ‘mere associations’ that emerge from such studies have limited implications for
standard-setting, while the latter argue that ‘fruitful insights’ emerge, especially regarding
the effects of accounting conservatism.
The earnings management literature has been judged to thus far have provided only
‘modest insights’ for standard-setters (Healy and Wahlen, 1999, p. 380). It is argued that
standard-setters will be unsurprised by the finding from aggregate accruals models that
earnings management occurs. What is now required is studies that identify which
accounting standards are used, what the dominant underlying motivation is and what
factors constrain such behaviour?