Value Relevance

Start:

Some value relevance research studies are motivated by standard setting and seek to draw some standard setting inferences from these studies. Their studies are based on theories of accounting, standard setting and valuation.

Question: Are these theories that underlie value relevance studies descriptive of standards setting and valuation? If they are not, then the associations between accounting numbers and equity valuations are just mere associations and have limited standard setting inferences.

The authors then seek to introduce value relevance studies
Literature contains papers that investigate the empirical relations between stock market values and particular accounting numbers
- Purpose: assess or providing a basis for the use or proposed use of those numbers in an accounting standard.
- It will therefore only be useful if the underlying theories are descriptive and can explain and predict accounting, standard setting and valuation.

*If standard setters do not think that a high association between accounting numbers and stock values a desirable attribute, then the value-relevance inference for standard setting will not be very useful either.
(So What? is Standard Setting 's objectives?)

There are many other studies that addresses reasons various parties to standard setting such as managers prefer certain accounting method alternatives. This other aspect is critical to standard setting since they identify factors that influence accounting standards especially contracting but not incorporated into value-relevance studies.

The authors then introduce the different types of studies

i) Relative association studies: association between stock market values and alternative bottom-line measures e.g. association with stock market values of GAAP earnings measure and alternative proposed standards ii) Incremental association studies: investigate whether a certain accounting number is helpful in explaining value or returns (long window)
iii)