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Price divergence from fundamental value and the value relevance of accounting information

Fung, Simon Yu Kit, Su, Lixin (Nancy) and Zhu, Xindong 2010, Price divergence from fundamental value and the value relevance of accounting information, Contemporary accounting research, vol. 27, no. 3, Fall, pp. 829-854, doi: 10.1111/j.1911-3846.2010.01028.x.

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Title Price divergence from fundamental value and the value relevance of accounting information
Author(s) Fung, Simon Yu Kit
Su, Lixin (Nancy)
Zhu, Xindong
Journal name Contemporary accounting research
Volume number 27
Issue number 3
Season Fall
Start page 829
End page 854
Total pages 26
Publisher Wiley-Blackwell
Place of publication Hoboken, N.J.
Publication date 2010-09
ISSN 0823-9150
1911-3846
Summary By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.
Language eng
DOI 10.1111/j.1911-3846.2010.01028.x
Field of Research 150103 Financial Accounting
1501 Accounting, Auditing And Accountability
Socio Economic Objective 900201 Administration and Business Support Services
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2010, The Canadian Academic Accounting Association
Persistent URL http://hdl.handle.net/10536/DRO/DU:30088347

Document type: Journal Article
Collection: Department of Accounting
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