Value relevance of consolidated financial statements information : Theory and test

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The purpose in this research is to test whether accounting information is useful to explain market values of equity over time. This research explains the value relevance of accounting information in two ways. First, I estimate the long-term explanatory power of parent and consolidated financial statements for measures of market value. Second, I test value relevance of accounting information concerning M&A, or restructuring. In this research, I specify the stochastic process of accounting variables in a dividend discounting model and clean surplus accounting, and derive the accounting based valuation model. It is confirmed that the long-term value relevance of earnings, the stockholders' equity book value is not lost. The long-term explanatory power of parent and consolidated financial statements, adjusted R-squared, is almost 5 to 20 %. I confirm that that the explanatory power has decreased still though I control the factors of intangible fixed assets and research and development costs. I also find that investors tend to expect future cash flows in analyzing the accrual based earning rather than past cash flows. In addition, I investigate the value relevance of performance measure, and M＆A information. In 1990's, stockholders of acquiring and target firms earned significant return of about 0.9 % and 4 % respectively at announcement date. I find that accounting information on the group strategy relates to market value.