Financial Crisis and Value Relevance of Financial Statements

Abstract

Purpose - Our purpose is to examine the impact of the financial crisis that occurred in the United States of America in 2008 on the value relevance of companies ‘financial statements. Also to examine what changed on the importance of the two most significant accounting variables, earnings and book value.

Design/methodology/approach - We determine value relevance basing on Ohlson's model using price models. Our sample consists of companies that constitute the Standard & Poor's 500 Index and we examine the period 2002 to 2014. We split our sample in pre and post crisis period. For each period we study the value relevance of financial statements and the importance of specific accounting variables.

Findings - According to findings, after the crisis there was a decline in value relevance of financial statements as the crisis has created an increase of uncertainty about the financial position of companies. Also earnings have gained in terms of value relevance against Book Value. Investors are expected to pay more attention to the ability of the company to produce wealth and less on financial position.

Research limitations/implications - Because we focus only on a specific Financial Crisis and only on USA listed firms, the research results may lack generalisability. Therefore, researchers are encouraged to test value relevance of financial statements during additional crises periods.

Practical implications - The paper includes implications for the development financial reporting standards as reveals weaknesses of financial statements on crises periods.

Originality/value - This paper fulfills an identified need to study how reliability and importance of financial statements can be changes on a financial crisis.