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Value relevance of alternative accounting performance measures: Australian evidence

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  • Ahsan Habib
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    Abstract

    Purpose – The paper aims to examine the value relevance of alternative accounting performance measures in Australia. It also documents the relative and incremental value relevance of revenue vis-à-vis earnings and the longitudinal changes in such value relevance. Finally, the impact of certain firm characteristics including firm life cycle on the value relevance of revenue and earnings information is investigated. Design/methodology/approach – The paper utilises data on Australian listed companies from 1992 to 2005 on the level of and changes in seven alternative accounting performance measures. Standard ordinary least square regression is conducted. Findings – Results reveal that: the coefficient estimates on all the performance measures are much higher for large firms compared to their small firm counterpart; the explanatory power of incremental revenue in explaining stock returns has declined significantly over the sample period; and life cycle analysis shows that the combined coefficients for both revenue and earnings are significant in the growth and maturity stages of the firm life cycle. Practical implications – When making equity valuation decisions investors consider firms' fundamentals as reflected in financial statements. However, which line item is more important for equity valuation is an important consideration. From a regulatory perspective, this stream of research is quite relevant because standard setters will have evidence from an investor viewpoint about whether certain line items, subtotals, and totals should be defined in standards and required to be displayed in financial statements. Originality/value – The paper adds to the existing capital market research in Australia by documenting differential persistence of alternative performance measures.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Accounting Research Journal.

    Volume (Year): 23 (2010)
    Issue (Month): 2 (September)
    Pages: 190-212

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    Handle: RePEc:eme:arjpps:v:23:y:2010:i:2:p:190-212

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    Related research

    Keywords: Accountancy; Asset valuation; Australia; Capital markets; Performance measures;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 105-231, September.
    2. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 39-67, December.
    3. Anthony, Joseph H. & Ramesh, K., 1992. "Association between accounting performance measures and stock prices : A test of the life cycle hypothesis," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 15(2-3), pages 203-227, August.
    4. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1992. "The market valuation implications of net periodic pension cost components," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 15(1), pages 27-62, March.
    5. Jegadeesh, Narasimhan & Livnat, Joshua, 2006. "Revenue surprises and stock returns," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 41(1-2), pages 147-171, April.
    6. Wild, John J., 1992. "Stock price informativeness of accounting numbers: Evidence on earnings, book values, and their components," Journal of Accounting and Public Policy, Elsevier, Elsevier, vol. 11(2), pages 119-154.
    7. DeFond, Mark & Hung, Mingyi & Trezevant, Robert, 2007. "Investor protection and the information content of annual earnings announcements: International evidence," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 43(1), pages 37-67, March.
    8. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 99-126, December.
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