Measurement alternatives for earnings, total assets, and total liabilities: The value-relevance of adjusting financial statement summary measures by a comprehensive financial reporting analysis.

Abstract

A secondary research question of interest to this thesis is that of differential valuation by investors between recognized versus alternatively disclosed financial data. These results offer inconsistent evidence on this question. Although similarities are occasionally evident, more often the alternative disclosures (as operationalized in this study) are valued differently from GAAP-based representations. However, several limitations of the present design and the research design of other studies that investigate the value-relevance of alternative and GAAP-based financial reporting warrant mentioning. Measurement error in the reporting of alternative forms of disclosures or the operationalization process used to quantify alternative disclosures can induce differences in valuation or create sufficient noise to mask how investors use the data. Also, the proposed adjustments and the methods of operationalizing the alternative disclosures are not meant to be exhaustive attempts to explain the way each adjustment might be done by investors. Nevertheless, this research is meant to add to the small body of research that quantifies off-financial-statement information and examines the value-relevance to stock prices of each and as aggregated with financial statement representations. To that end, this study contributes initial empirical evidence on how investors apparently perceive alternative financial reporting disclosures and impound those alternative disclosures into firms' common equity values.

This thesis tests whether investors consider alternative forms of financial reporting than financial statement representations (e.g., information on operating leases or disclosures of the fair market value of pension plan assets) to be value-relevant. In this study, alternative disclosures are conditioned on and also aggregated with their related GAAP-based summary measures (i.e., financial statement representations of assets, liabilities, and earnings) to investigate their usefulness as joint inputs into the market value of common equity. The thesis predicts that the data from alternative disclosures, individually and in aggregation with GAAP-based summary measures (i.e., financial statement representations of assets, liabilities, and earnings), are informative to investors' assessment of equity values. In addition to providing empirical evidence on the value-relevance of each alternative disclosure and adjusted summary measures, this study tests the question of valuation equivalency between recognized and disclosed (but unrecognized) data.

The results of this study's empirical tests on the value-relevance of alternative disclosures conditioned on GAAP-based information are consistent with the predictions on four of the five asset adjustments, three of the four liability adjustments, and the three types of adjustments to earnings. This suggests that most of the alternative disclosures, as operationalized in this thesis, are incrementally informative to GAAP-based summary information on firms' resources, obligations, and performance. For the tests of the aggregation process to describe alternative summary financial signals, the empirical results support the prediction that summary measures of resources and obligations better reflect the data generating process in equity values using either an asset-and-liability-based or Feltham-Ohlson valuation model than do reported measures of resources and obligations. However, for an earnings-based valuation model, the results do not support the prediction that adjusted earnings better reflects the data generating process in market values (or returns) than does reported earnings.