Value Relevance of Accounting Information during IFRS Convergence Process and Indonesia

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In value relevance literature, there are two basic types of valuation model that have extensively used by prior studies. Price model testing how firm`s market value relate to accounting earnings and equity book value. As seen in equation 1, based on Ohlson (1995), the model expresses the firm value as a function of its earnings and equity book value. The other type of value relevance valuation model is return model, which describes relation between stock returns and accounting earnings. The value relevance of accounting information studies using returns-earnings association is motivated by the seminal work of Ball and Brown (1968). Then, Easton and Harris (1991) popularized a specific version of annual return model including both earnings …show more content…
Following previous studies and based on Kothari and Zimmerman suggestion, this study uses both price and return models in assessing value relevance of accounting information.
P_it=α_0+α_1 E_it+α_2 EBV_it+ε_it 1)
P_it = stock price of firm i (at three months after end of year t),
E_it = Earnings per share for firm i during period t,
〖EBV〗_(it ) = Equity book value per share for firm i at the end of period t.
R_it=α_0+α_1 E_it/P_(it-1) +α_2 ((E_it-E_(it-1)))/P_(it-1) +ε_it (2)
R_it = Stock return firm i for year t (annual return from month -9 to +3),
E_it = Earnings per share of firm i for year t,
E_it-E_(it-1) = Change in annual earnings per share,
P_(it-1) = The stock price at the beginning of nine months prior to fiscal year end.
This study estimates price model and return model described above to examine the hypothesis, and the results of the two models are expected to complement each other. To examine the change in relative value relevance of accounting information under substantially IFRS-convergent accounting standards after recent revisions of the standards, this study estimates equation 1 and 2 using subsample of the period before and after standards changes (2005-2008 and 2009-2012). We expect the coefficients of E_it,〖EBV〗_(it

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