This paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors, and provides insights into questions of interest to standard setters. A primary focus of financial statements is equity investment. Other uses of financial statement information, such as contracting, do not diminish the importance of value relevance research. Value relevance questions can be addressed using extant valuation models. Value relevance studies address econometric issues that otherwise could limit inferences, and can accommodate and be used to study the implications of accounting conservatism.

This study tests predictions that pricing multiples on and incremental explanatory power of equity book value (net income) increase (decrease) as financial health decreases. Tests using a sample of 396 bankrupt firms and tests using a larger, pooled sample both yield inferences consistent with predictions. Findings are robust to inclusion of controls for industry, size, return-on-equity, and volatility of equity returns. Equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries, selected based on the likely extent of unrecognized intangible assets.

This paper examines whether market participants implicitly assign different coefficients to pension cost components when determining security prices. The major findings are: (1) The pension cost components' coefficients generally differ from one another. As predicted, the transition asset amortization coefficient is lower than other pension coefficients, and is insignificantly different from zero. (2) Consistent with the market viewing pension-related income streams as less risky, the pension coefficients are generally larger than the nonpension coefficients. Additional specification tests permitting nonpension coefficients to vary with risk, tax-payer status, and industry membership, generally support the basic findings, although the significance levels are generally higher.

The study explores the incremental explanatory power of replacement cost earnings variables (derived from ASR 190 data) with respect to explaining cross sectional differences in security returns. As such, the study is a natural extension of previous research, including analyses of the effect of security returns of ASR 190 data at the time of disclosure, investigations of cross sectional relationships between security returns and historical cost earnings, and studies of multiple signals. The basic finding is that pre-holding gain net income provides no incremental explanatory powerm given knowledge of historical cost earnings. However, the converse does not hold. Taken together, the findings are consistent with the contention that pre-holding gain net income is a garbled version of historical cost earnings. The basic finding is robust under several extensions of the initial research design. The research design incorporates a two-stage approach which permits a determination of the incremental explanatory power of collinear variables. The findings are in contrast to those of a previous study by Easman et al. (1979). The nature of the difference in research design inducing the difference is identified. Potential reasons for the difference in findings are provided.

We examine whether application of International Accounting Standards (IAS) is associated with higher accounting quality. The application of IAS reflects combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do matched sample firms applying non‐U.S. domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the postadoption differences. Firms applying IAS generally evidence an improvement in accounting quality between the pre‐ and postadoption periods. Although we cannot be sure our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate effects of both.

This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm‐level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. We predict that too-important-to-fail (TITF) banks took less advantage of this option because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of this option since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital and thereby retaining flexibility to sell assets. Our findings provide evidence that accounting choices are affected by the importance of banks to their economies.

This study examines whether audit firms hire former PCAOB employees in response to negative PCAOB inspection reports, and whether such hiring leads to reductions in future inspection deficiencies and an increase in audit quality. We find that the number of PCAOB employees hired by large audit firms is positively related to the number of deficiencies reported in their prior inspection reports, and that the number of deficiencies reported in firms' future inspection reports is negatively associated with the number of former PCAOB employees hired. However, we find no significant association between the number of former PCAOB employees that a firm hires and improvement in audit quality. These findings suggest that former PCAOB personnel possess valuable knowledge about how to perform and document audit procedures to satisfy PCAOB reviewers, but that this expertise does not necessarily have direct implications for the accuracy and reliability of clients' financial reports.