Salient accounting value drivers and equity re-turns : Evidence from US industries


  • Omar Camara Prince Mohammad Bin Fahd University





Capital Markets, Financial Accounting, Equity Returns, US Industries, Panel Data.


Past literatures suggest the presence of ubiquitous disquiet among corporate financial managers, financial analysts and portfolio managers that changes in certain accounting variable's results in changes in stock prices, irrespective of whether future cash flow's subsume these changes in salient accounting variables. Using an empirical rational inquiry, this paper attempts to test whether there is any relationship between salient accounting variables and equity returns for five major US industries (Manufacturing, Services, Wholesale, Constructions and Retail) from the period 1996 to 2015, and as a result, may contribute to accretion or loss in stockholders’ wealth. To account for divergent industry-specific revenue generating process and the existing fluidity in industry-specific application of accounting standards, this study thus disaggregates sample data by industry. The industry approach implies that the effect of salient accounting variables on equity prices may be described as a conflation of industry-specific characteristics and capital market synergies. Consistent with this notion, this study finds that salient accounting variables which are used to measure operating performance, growth opportunities, investment management and profitability have the significant impact on equity returns. However, and most importantly, the study finds that the impact of the salient accounting variables varies from one industry to another. As such, this study is particularly useful for equity market participants in the identification of industry related, market-relevant accounting variables, which may be used to guide future financial policies.


[1] Aaker, A. D, Jacobson, R. (2001), the Value Relevance of Brand Attitude in High-Technology Markets, Journal of Marketing Research 38 (4): 485-493.

[2] Aboody, D. and Lev, B. (1998), ‘‘the value-relevance of intangibles: the case of software capitalization’’, Journal of Accounting Research Supplement, Vol. 36, pp.161-91.

[3] Al Harbi, A.D. (2003). Do investors attach higher valuation weights to cash flow-based measures than to accrual-based measures in valuing intangible-intensive, high technology stocks? (Doctoral Dissertation, Florida Atlantic University).

[4] Amir, E., & Lev B. (1996). Value-Relevance of non-financial information: the wireless communications industry. Journal of Accounting and Economics, 22, 3-30

[5] Ball R. The Theory of Stock Market Efficiency: Accomplishments and Limitations. Journal of Applied Corporate Finance, 1995; 8(1):4-18.

[6] Ball, R., Brown, P. (1968), "An empirical evaluation of accounting income numbers", Journal of Accounting Research, Vol. 6 pp.159-77.

[7] Belkoui, A.R. (1992), Accounting Theory,Harcourt Brace Jovanovich, San Diego, CA

[8] Beaver, W.; R. Lambert; and D. Morse. “The information Content of Security Prices.†Journal of Accounting and Economics (March 1980): 3-28.

[9] Boone, J.P. (2002). Revisiting the reportedly weak value relevance of oil and gas asset present values: The roles of measurement error, model misspecification and time period idiosyncrasy. Accounting Review, 77(1), 73.

[10] Burgsthaler, D., & Dichev I. (1998). Earnings, adaptation, and equity value. The Accounting Review, 72, 187-215

[11] Chandra, U., & Ro, B.T. (2008). The role of revenue in firm valuation. Accounting Horizons, 22(2), 199-222.

[12] Cheng, C.S.A., Yang, S.S.M. (2003), "The incremental information content of earnings and cash flows from operations affected by their extremity", Journal of Business Finance & Accounting, Vol. 30 No.1/2, pp.73-116.

[13] Christie Florou Constantinos Chalevas, (2010),"Key accounting value drivers that affect stock returns: evidence from Greece", Managerial Finance, Vol. 36 Iss 11 pp. 921 - 930

[14] Dhaliwal, D.S. (1986), ‘‘Measurement of financial leverage in the presence of unfounded pension liabilities’’, The Accounting Review, Vol.61, pp.651-61.

[15] Dukes, R. (1976), ‘‘An investigation of the effects of expensing research and development costs on security prices’’, in Sorter, M.C. (Ed.), Proceedings of the Conference on Topical Research in Accounting,New YorkUniversity,New York, NY.

[16] Easton, P. and T. Harris. (1991). ‘‘Earnings as an Explanatory Variable for Returns.’’ Journal of Accounting Research 29, 19–36.

[17] Fama, E. (1976), Foundation of Finance,Basic Books, New York, NY.

[18] García-Ayuso, M., Monterrey J., & Pineda C. (1998). Empirical evidence on the convex relationship between prices, earnings and book values: the role of abnormal earnings in equity valuation. Working paper. University of Seville.

[19] Graham, John R. Harvey, Campbell R. and Rajgopal, Shiva. The economic implications of corporate financial reporting, Journal of Accounting and Economics 40 (2005): 3–73

[20] Hand, J.R. (1990), ‘‘A test of the extended functional fixation hypothesis’’, The Accounting Review, Vol. 65, pp.740-63.

[21] Harris, T.S. and Ohlson, J.A. (1987), ‘‘Accounting disclosure and the market’s valuation of oil and gas properties’’, The Accounting Review, Vol. 62, pp.651-69.

[22] Hirschey, M., V. J. Richardson, and S. W. Scholz. 2001. Value relevance of nonfmancial information: The case of patent data. Review of Quantitative Finance & Accounting (November): 223-236

[23] Hopkins, P.E., Houston, R.W. and Peters, M.F. (2000), ‘‘Purchase, pooling, and equity analysts’ valuation judgments’’, The Accounting Review, Vol. 75, pp.257-81.

[24] Hughes, K.E. (2000). The value relevance of nonfinancial measures of air pollution in the electric utility industry. Accounting Review, 75(2), 209.

[25] Junttila, J., Kallunki, J., Karja, A., & Martikainen, M. (2005). Stock market response to analysts’ perceptions and earnings in a technology-intensive environment. International Review of Financial Analysis, 14(1), 77-92.

[26] Kang, S. and Zhao, Y. (2010), Information content and value relevance of Depreciation: A cross-Industry Analysis, The Accounting Review, Vol.85 pp.227-260.

[27] Kothari, S.P. (2001), ‘‘Capital markets research in accounting’’, Journal of Accounting and Economics, Vol. 31, pp.105-231

[28] Lev, Baruch, and Paul Zarowin, (1999), “The boundaries of financial reporting and how to extend themâ€. Journal of Accounting Research, 37 (2), 353-385.

[29] Lev, B. and Sougiannis, T. (1996), ‘‘the capitalization, amortization, andvalue-relevance of R&D’’, Journal of Accounting and Economics, Vol.21, pp.107-38.

[30] Liang, C., & Yao, M. (2005). The value-relevance of financial and nonfinancial information-evidence from Taiwan’s information electronics industry. Review of Quantitative Finance and Accounting, 24(2), 135-157

[31] Liu, J., Liu, C. (2007), "Value relevance of accounting information in different stock market segments: the case of Chinese A-, B-, and H-shares", Journal of International Accounting Research, Vol. 6 pp.55-81.

[32] Luft, J.L. and Shields, M.D. (2001), ‘‘why does fixation persist? Experimental evidence on the judgment performance effects of expensing intangibles’’, The Accounting Review, Vol. 76, pp.561-87.

[33] Merton H. Miller and Franco Modigliani (1961), Dividend Policy, Growth, and the Valuation of Shares, the Journal of Business, Vol. 34, No. 4 (Oct., 1961), pp. 411-433.

[34] Negakis, C.J. (2005). Accounting and capital markets research: A review. Managerial Finance, 31(2), 1-23.

[35] Panagiotis E. Dimitropoulos, Dimitrios Asteriou, (2009),"The value relevance of financial statements and their impact on stock prices: Evidence from Greece", Managerial Auditing Journal, Vol. 24 Iss 3 pp. 248-265

[36] Penman, S. H. “Financial Statement Information and the Pricing of Earnings Changes.†The Accounting Review 67 (1992): 563-77.

[37] Pradosh Simlai, (2009),"Stock returns, size, and book-to-market equity", Studies in Economics and Finance, Vol. 26 Iss 3 pp. 198-212

[38] Richardson, Gordon D, and Surjit Tinaikar. 2004. Accounting based valuation models: what have we learned? Accounting and Finance 44:223-255.

[39] Riley, R.A., Pearson, T.A., & Trompeter, G. (2003). The value relevance of non-financial performance variables and accounting information: The case of the airline industry. Journal of Accounting & Public Policy, 22(3), 231-254.

[40] Scott, W. 2003. Financial Accounting Theory. Pearson Education. Toronto. Ontario.

[41] Scott Pirie, Malcolm Smith, (2008),"Stock prices and accounting information: evidence from Malaysia", Asian Review of Accounting, Vol. 16 Iss 2 pp. 109-133

[42] Tan, P.M., & Lim, C.Y. (2007). The value relevance of accounting variable and analysts’ forecasts: The case of biotechnology firm. Review of Accounting & Finance, 6(3), 233-253.

[43] Tinic, S.M. (1990), ‘‘A perspective on the stock market’s fixation on accounting numbers’’, The Accounting Review,Vol. 65, pp.781-96.

[44] Wasiuzzaman, S., Sahafzadeh, I., Rezaie Nejad, N. (2015). Prospect theory, industry characteristics and earnings management: A study of Malaysian industries. Review of Accounting and Finance, 14 (3), 324-347.

[45] Watts, R.L. and Zimmerman, J.L. (1986), Positive Accounting Theory,Prentice-Hall, London.

View Full Article: