The Value Relevance of Financial Accounting Information in a Transition Economy: The Case of the Czech Republic

ABSTRACT

The paper investigates the value relevance of accounting information in the Czech Republic in 1994–2001. Value relevance is understood as the ability of financial statement information to capture or summarise information that affects share values and empirically tested as a statistical association between market values and accounting values. The objective of the study is to investigate the validity of the value relevance methodology by finding an accounting setting where the results of value relevance tests might be predicted unambiguously. If the results of these tests confirm the predicted results, the validity of the value relevance methodology might be assumed. A transition economy represented by the Czech Republic provides such an institutional and accounting setting. It might be assumed that value relevance of accounting information is lower in a transitional economy than in a well-developed market economy. It can also be assumed that the value relevance increases over time as a result of the progress in transition. The results of the study confirm these predicted results and give thus supportive evidence of the validity of the value relevance methodology.

Acknowledgements

The financial support from the Torsten och Ragnar Söderberg Foundation is gratefully acknowledged. I wish to thank Kenth Skogsvik for his excellent guidance and advice during the whole research process James Ohlson for valuable discussions and comments, Kari Lukka and anonymous referees for insightful suggestions, and my colleagues at the Center for Financial Analysis and Managerial Economics in Accounting for their help and support. All views and errors are my own.