Price divergence from fundamental value and the value relevance of accounting information

Yu Kit, Simon FUNG, Lixin, Nancy SU, Xindong,Kevin ZHU

Research output: Journal PublicationsJournal Article (refereed)

17 Citations (Scopus)

Abstract

By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.
Original languageEnglish
Pages (from-to)829-854
Number of pages26
JournalContemporary Accounting Research
Volume27
Issue number3
DOIs
Publication statusPublished - 1 Sep 2010
Externally publishedYes

Fingerprint

Accounting information
Divergence
Fundamental values
Value relevance
Noise trading
Arbitrage
Stock prices
Costs
Cost uncertainty
Market price
Information uncertainty
Transaction costs

Keywords

  • Fundamental values
  • Market efficiency
  • R2s
  • Value relevance

Cite this

@article{dfa658f7b2fe4f64bfd4b034f5077b9e,
title = "Price divergence from fundamental value and the value relevance of accounting information",
abstract = "By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.",
keywords = "Fundamental values, Market efficiency, R2s, Value relevance",
author = "FUNG, {Yu Kit, Simon} and SU, {Lixin, Nancy} and Xindong,Kevin ZHU",
year = "2010",
month = "9",
day = "1",
doi = "10.1111/j.1911-3846.2010.01028.x",
language = "English",
volume = "27",
pages = "829--854",
journal = "Contemporary Accounting Research",
issn = "0823-9150",
publisher = "Wiley-Blackwell",
number = "3",

}

Price divergence from fundamental value and the value relevance of accounting information. / FUNG, Yu Kit, Simon; SU, Lixin, Nancy; ZHU, Xindong,Kevin.

In: Contemporary Accounting Research, Vol. 27, No. 3, 01.09.2010, p. 829-854.

Research output: Journal PublicationsJournal Article (refereed)

TY - JOUR

T1 - Price divergence from fundamental value and the value relevance of accounting information

AU - FUNG, Yu Kit, Simon

AU - SU, Lixin, Nancy

AU - ZHU, Xindong,Kevin

PY - 2010/9/1

Y1 - 2010/9/1

N2 - By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.

AB - By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.

KW - Fundamental values

KW - Market efficiency

KW - R2s

KW - Value relevance

UR - http://commons.ln.edu.hk/sw_master/5227

U2 - 10.1111/j.1911-3846.2010.01028.x

DO - 10.1111/j.1911-3846.2010.01028.x

M3 - Journal Article (refereed)

VL - 27

SP - 829

EP - 854

JO - Contemporary Accounting Research

JF - Contemporary Accounting Research

SN - 0823-9150

IS - 3

ER -