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1. Introduction
Research into capital markets has devoted considerable time and effort to the analysis of the relation between stock prices and financial statements. A primary focus of accounting research is to assess whether stock prices move in the direction and reflect the magnitude of reported earnings and book value when financial information is disclosed to the capital market (Lim and Park, 2011). Value relevance is defined as the informativeness of financial statements (Lam et al., 2013). Value relevance research examines the association between stock price (the dependent variable) and a set of independent accounting variables. An accounting variable is considered value relevant if it is significantly associated with the dependent variable (Beaver, 2002). It is assumed that the higher the value relevance, the more the financial statement information can be relied upon in making investment decisions; thus, the closer the association between the financial statements and the share price or returns of a company is (Lam et al., 2013). Barth et al. (2001) argue that the key purpose of value relevance research is “to extend our knowledge regarding the relevance and reliability of accounting amounts as reflected in equity values” (Barth et al., 2001, p. 80).
Beginning with the seminal work of Ball and Brown (1968) and Beaver (1968), the past four decades has produced a substantial volume of work that shows that market reaction is significantly associated with financial statement information (Habib, 2010). However, there is a widespread impression that financial statement information has lost its value relevance because of a shift from the traditional, capital-intensive economy to a high technology, service-oriented economy (Dontoh et al., 2007). Examples of prior studies that have observed this decline include Harris et al. (1994) in Germany, and the following studies in the USA: Collins et al. (1997), Lev and Zarowin (1999), Francis and Schipper (1999), Brown et al. (1999), Ryan and Zarowin (2003) and Dontoh et al. (2004). Although these studies use moderately different measures to capture the value relevance of financial statements, they all find that it has declined over recent decades (Givoly et al., 2013).
Conversely, certain studies have observed an improvement. For example, using Korean data, Kim and Key (2014) show an increase in the value relevance of...