The Effect of SFAS No.34 on the Value Relevance of Earnings and Equity Book Value
Date Issued
2009
Date
2009
Author(s)
Huang, Yu-Lun
Abstract
Due to the wave of moving accounting standard toward the standards of IASB (International Accounting Standard Board), we also enacted the SFAS no.34, ”Accounting for Financial Instruments”, which has been effective since 2006. However, there have been lots of critics about its usefulness and relevance. It may be important to know whether investors rely on information provided by this standard. Therefore, the core idea of this study is to tell the effect of SFAS No.34 on the value relevance of earnings and equity book value, and simultaneously, to investigate the incremental explanatory power of “ valuation gains or loss on financial assets/ liabilities” and “ unrealized gains and loss on financial instruments” in SFAS No.34 on equity value. The models used in this study are based on Ohlson (1995) model. By checking the association of price , and earnings, equity book value, “ valuation gains or loss on financial assets/ liabilities” and “ unrealized gains loss on financial instruments” and, the change in value relevance of earnings, equity book value, and value relevance of “ unrealized gains and loss on financial instruments” and “ valuation gains or loss on financial assets/ liabilities” could be distinguished. As for the results of this study, first, earnings and equity book value are both positively associated with price. This indicates that earnings and equity book value still played important roles in investors’ decision-making in 2004-2005 period and 2006-2007 period. While the association of earnings and price becomes higher from 2004-2005 period to 2006-2007 period, the association of equity book value and price becomes lower. This tells that the value relevance of earnings and equity book value rises and declines after the adoption of SFAS No.34. In addition, the association between “ valuation gains or loss on financial assets/ liabilities” and price is with better performance in 2006-2007 period than in 2004-2005 period. However, the association of “ unrealized gains and loss on financial instruments” and price performs better in 2004-2005 period than in 2006-2007 period. These indicate that “ valuation gains or loss on financial assets/ liabilities” recognized by fair value method in SFAS No.34 is of value relevance, but “ unrealized gains and loss on financial instruments” recognized by fair value method in SFAS No.34 is not. Furthermore, by controlling the effect of company size, negative earnings, non-recurring items, and SFAS No.35, and do the same empirical tests with consolidated financial data, the results remain robust. Finally, this study investigates the impact of SFAS No.34 on earnings and equity book value in electronic and financial industries. However, the results of electronic industry and financial industry are not that similar to those of the whole industries.
Subjects
SFAS No.34
Fair value of financial instrument
Value relevance
Earnings,
Equity book value
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