Relative and incremental value relevance of book value and earnings during the global financial crisis

Purpose – The purpose of this study is to examine the relative and the incremental value relevance of book value and earnings in the Australian market in the context of the 2008-2009 global financial crisis (GFC) and the non-crisis period (NCP). Design/methodology/approach – Least square regressions are used to examine the research questions. Changes in the coefficient estimates and the relative explanatory power (adjusted R 2) of book value (BV) and earnings between the GFC and the NCP are examined. Findings – The findings suggest that both BV and earnings are value relevant in the Australian market surrounding the GFC. There were structural breaks in the association of BV and earnings with firms’ market value. The value relevance of earnings has increased and that of BV has decreased during the GFC compared to the NCP. During the study period, the explanatory power of earnings was greater than that of the BV. Research limitations/implications – The single country context examined limits the generalisability of the findings. Practical implications – The importance of this study lies in its showing the sustained importance of earnings in security valuation even during a period of macroeconomic uncertainty. Australian accounting standards have been shaped by a balance sheet focus. The recent move towards the fair value-based International Financial Reporting Standards (IFRS) has further enhanced the focus on the balance sheet. Nevertheless, the evidence in the present study demonstrates that even for a country with a balance sheet focus, the value relevance of earnings increases during a GFC. Hence, it is the earnings number, rather than the balance sheet, which should receive greater attention from accounting regulators and auditors. Originality/value – This is the first known study to examine the value relevance of fundamental accounting information, such as BV and earnings, in the context of the 2008-2009 GFC. It extends prior research in the context of the 1997 Asian financial crisis and provides evidence on the impact of a worldwide exogenous shock on the value relevance of BV and earnings from a relatively mature and developed country with different legal, institutional and enforcement backgrounds.