This paper uses panel cointegration with a corresponding vector error correction model (VECM) to investigate the changes in the value relevance of accounting information before and after the mandatory adoption of IFRS in Germany and the UK under three different valuation models. First, a basic Ohlson model where our results indicate that while the value relevance of the book values of equity has declined, it has been replaced by the increasing prominence of earnings in both Germany and the UK after the switch to the IFRS. Second, a modified model, which shows that the incremental value relevance of both earnings and book values are considerably higher in the long term for firms in the UK than in Germany. Third, a simultaneous addition of accounting and macroeconomic variables in an extended model, revealed a significant rise in the relative predictive power of the book value of equity in the UK compared with the more noticeable impact on the value relevance of earnings in Germany. Further, our results show a statistically significant negative coefficient on the lagged error correction term indicates that a long-run Granger-causal relationship exists between our accounting variables and share prices in the UK. Collectively, the explanatory power of our three equity valuation models is lower in Germany than in the UK, reflecting the former country’s conservative financial reporting system. The usefulness of policy reforms for enhancing the complementarity of financial accounting information and economic data is highlighted in this study.
|Journal||Journal of International Accounting, Auditing and Taxation|
|Early online date||7 Dec 2016|
|Publication status||Published - 2017|
Bibliographical noteThis is an open access article under the CC BY license (http://creativecommons.org/licenses/
- Modified Ohlson model
- Value relevance
- vector error correction model