8 Accounting and Regulatory Issues

Have Financial Statements Lost Their

Relevance?
Jennifer Francis and Katherine Schipper
Journal of Accounting Research
vol. 37, no. 2 (Autumn 1999):319352
The authors explore the concern that financial statements no longer have the same relevance to investors
that they had in the past. They test for value relevance
by measuring the total return that could have been
earned from prior knowledge of financial statement
information and by examining the explanatory power of
accounting information on market values and annual
market-adjusted returns. Both analyses are applied to a
broad sample of exchange-listed and Nasdaq firms for
the 195294 period. The authors find mixed evidence
on value relevance of financial statement reporting during the test period.

Francis and Schipper test the empirical implications of the largely

anecdotal claims that financial statement reporting has lost its
relevance. They measure the value of current reporting practice in
two ways: (1) by measuring the total return that could have been
earned with prior knowledge of financial statement information
and (2) by measuring the explanatory power of financial statement
information for determining annual market-adjusted returns and
market values. Francis and Schipper examine the ability of earnings to explain annual market-adjusted returns and the ability of
earnings and the book values of assets and liabilities to explain
market values of equity. A decrease in explanatory power over time
for either measure would indicate a loss of value relevance in
financial reporting. The test sample is a broad selection of
exchange-listed and Nasdaq firms from 1952 to 1994.

Jennifer Francis and Katherine Schipper are at Duke University. The

summary was prepared by Kathryn Dixon Jost, CFA, AIMR.
2000, Association for Investment Management and Research

Accounting and Regulatory Issues 9

Francis and Schipper also consider the possibility that a loss in

value relevance is attributable to the relative increase in importance
and domination of high-technology firms. A frequent criticism of
current financial reporting is its lack of applicability to the hightech industry; current financial reporting practices are charged with
being out of date with the industry. Francis and Schipper test this
concern by repeating the analyses on two subsamples of firms:
high-tech firms (such as pharmaceuticals, computers, and telecommunications) and firms in industries that have experienced little
technological innovation (such as railroads, grocery stores, and
wood and paper products).
Over the sample period, Francis and Schipper find mixed results.
The evidence shows a decline in the relevance of earnings information but an increase in the relevance of balance sheet informationthe book value of assets and liabilities. These results are
largely consistent with other research that has examined the value
relevance of financial statement reporting. The data also suggest
that no difference exists in the value relevance of financial statement information between high- and low-technology companies.
Keywords: Financial Statement Analysis: accounting and financial reporting issues

The CFA Digest Summer 2000