The Value Relevance of Financial and Non-Financial Information: Evidence from Recent Academic Literature

Introduction

Over the last four decades, value-relevance research has played an important role in understanding the valuation impact of various types of financial information. If any accounting information has a predicted association with equity market values, it is referred to as value relevant (Barth, Beaver, & Landsman, 2001); that is, value relevance is the ability of accounting numbers to explain the underlying differences in stock prices in capital markets. The seminal studies of Ball and Brown (1968) and Beaver (1968), in which they documented accounting income numbers as being informative for valuation, mark the beginning of capital market-related valuation research in accounting. Since then, many studies have documented the various valuation impacts of financial information. The valuation implications of non-financial information also originated a long time ago. Prior research includes studies examining the customer market penetration in the wireless communication industry (Amir & Lev, 1996); the citations of the patent application in the science and technology-based firms (Deng, Lev, & Narin, 1999); web usage in the valuation of internet stocks (Rajgopal, Venkatachalam, & Kotha, 2003); non-financial performance in the airline industry (Behn & Riley, 1999); and environmental performance (Barth and McNichols, 1994; Hughes, 2000; Johnston, Sefcik, & Soderstrom, 2008). According to Barth et al. (2001), the ‘value relevance’ terminology was first used by Amir, Harris, and Venuti (1993), with this followed by a formal valuation model developed by Ohlson (1995) which, to date, is the model predominantly used for value-relevance research.

This chapter uses an integrative approach to discuss the findings of recent value-relevance studies on financial and non-financial information and highlights the importance of integration between financial and non-financial information in valuation research. Prior survey articles have mainly focused on analyzing valuation research in different time periods focusing on either financial or non-financial information. An integrated discussion on the valuation implications of both financial and non-financial information is important as the business world has witnessed a proliferation of non-financial disclosures. Furthermore, the traditional form of reporting is also being challenged as new forms of reporting emerge (e.g., integrated reporting and the use of extensible business reporting language [XBRL]). Although an alternative form of reporting¹ has been introduced as mandatory in some countries, the traditional form is followed by the majority of countries. In consideration of this changing environment, this chapter reviews the recent value-relevance academic literature as the basis for responding to the key question of how the usefulness of financial and non-financial information could be increased.

Value-relevance research provides important evidence about the type of information that is related to the firm’s market value. Despite an extensive amount of research having been conducted on the value relevance of financial and non-financial information, a very limited number of studies have reviewed the impact of this research. The objective of this chapter is to shed light on the importance of financial and non-financial information in the context of the capital market by drawing from recent value-relevance studies that have used the Ohlson (1995) model to examine the value relevance of financial or non-financial information. We are aware that the value-relevance literature is extensive; therefore, we have only focused on a selected number of financial and non-financial value-relevance studies published in reputed accounting journals for the period 2010–2016. These years have been selected as other researchers have provided a comprehensive summary of the published value-relevance research before this period (e.g., see Beisland (2009) for the value relevance of financial information and Clarkson (2012) for the value relevance of environmental performance, a specific component of non-financial information). We also acknowledge that we have reviewed papers based on this chapter’s theme and that our review and discussion in the chapter are based on the recent value-relevance literature.