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Financial Accounting Information And The Relevance/Irrelevance Issue

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  • Stanley C. W. Salvary

Abstract

Some current research conclude that the numbers in financial statement are not relevant for three basic reasons. The numbers: (1) are not isomorphic1 with capital market values, (2) do not have a future orientation, and (3) are un-interpretable since they are based upon five different measurement attributes. The lack of isomorphism argument is invalid since actual current performance is not identical with the capital market expectations of future performance. The lack of a future orientation argument is invalid since financial statements capture what has happened and not what is expected to happen. Since a single measurement attribute is required to produce meaningful measures, the un-interpretability argument holds. A unique measurement attribute is identified in this paper to address this problem

Suggested Citation

  • Stanley C. W. Salvary, 2005. "Financial Accounting Information And The Relevance/Irrelevance Issue," Finance 0502016, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0502016
    Note: Type of Document - wps; pages: 43
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    File URL: http://econwpa.repec.org/eps/fin/papers/0502/0502016.pdf
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    References listed on IDEAS

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    2. David M. Jones & John J. Mingo, 1998. "Industry practices in credit risk modeling and internal capital allocations: implications for a models-based regulatory capital standard," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 53-60.
    3. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    4. Anne Beatty, 1995. "The effects of fair value accounting on investment portfolio management: how fair is it?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 25-39.
    5. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA.
    6. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
    7. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    8. John Kay, 2001. "What became of the New Economy?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 177(1), pages 56-69, July.
    9. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
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