The Relevance of the Value Relevance Literature For Financial Accounting Standard Setting: Another View

Mary E. Barth Graduate School of Business Stanford University

William H. Beaver Graduate School of Business Stanford University

Wayne R. Landsman Kenan-Flagler Business School University of North Carolina – Chapel Hill

January 2001

We thank Dan Collins, Brian Rountree, participants at the 2000 Journal of Accounting & Economics conference, and the editors, S. P. Kothari, Tom Lys, and Jerry Zimmerman, for helpful comments and suggestions. We appreciate funding from the Financial Research Initiative, Graduate School of Business, Stanford University, and Center for Finance and Accounting Research at UNC-Chapel Hill, Stanford GSB Faculty Trust, and the Bank of America Research Fellowship. Corresponding author: William H. Beaver, Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, CA 94305-5015, (650) 723-4409, fbeaver@leland.stanford.edu

The Relevance of the Value Relevance Literature For Financial Accounting Standard Setting: Another View

Abstract This paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors, and provides insights into questions of interest to standard setters. A primary focus of financial statements is equity investment. Other uses of financial statement information, such as contracting, do not diminish the importance of value relevance research. Value relevance questions can be addressed using extant valuation models. Value relevance studies address econometric issues that otherwise could limit inferences, and can accommodate and be used to study the implications of accounting conservatism.

1. Introduction This paper offers a view of the relevance of value relevance research for financial accounting standard setting that contrasts