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The Declining Value Relevance of Accounting Information and Non Information-Based Trading: An Empirical Analysis

Authors: Dontoh, Alex
Radhakrishnan, Suresh
Ronen, Joshua
Keywords: Noisy rational expectations equilibrium;Non-information-based trading;Value relevance
Issue Date: 9-Aug-2000
Series/Report no.: Alex Dontoh-1
Abstract: Recently, a growing body of literature has suggested that financial statements have lost their value relevance because of a shift from a traditional capital-intensive economy to a hightechnology, service-oriented economy. These conclusions are based on studies that find a temporal decline in the association between stock prices and accounting information (earnings and book values). This paper empirically tests a theoretical prediction arising from the Noisy Rational Expectations Equilibrium model that suggests that the decline could be driven by noninformation- based (NIB) trading activity, because such trading reduces the ability of stock prices to reflect accounting information. Specifically, Dontoh et al. (2004) show that when NIB trading increases, the R-squares of a regression of stock price on accounting information declines. Our empirical tests confirm this prediction; i.e., the decline in the association between stock prices and accounting information as measured by R-squares is driven by an increase in NIB trading.
Appears in Collections:Accounting Working Papers

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