Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale : The US Evidence

The structural shift in the US from a tangible- to an intangible-intensive economy raises a concern that GAAP-based reporting might have lost its usefulness to investors. Amir and Lev (1996) argue that accounting information is not useful for intangible-intensive firms. In contrast, Collins et al. (1997) find that the value relevance (measured by R-squared) of accounting information has increased over time and that value relevance for intangible-intensive industries is as high as that for tangible-intensive industries. In this article we attempt to resolve the above discrepancy by examining the impact of scale on R-squared (Brown et al., 1999). We find that, after controlling for scale, R-squared is lower for intangible-intensive industries than for non-intangible-intensive industries and has declined over time for intangible-intensive industries but remained stable for non-intangible-intensive industries. Interestingly, the declining trend ended with the demise of the “New Economy” period (NEP) (Core et al., 2003), and value relevance for both industry groups appears to be restored in the post-NEP to the pre-NEP level. We also find that R&D capitalization increases value relevance for intangible-intensive industries, but does not completely eliminate the gap between the two groups