Abstract

This paper examined whether the value relevance of earnings and equity value is changed withaccruals quality. Prior studies in Korea have showed that the value relevance of earnings andequity value have changed with many factors such as continuing audit time, auditor size, publicregulation onaudit quality, ownership structure, and the adoption of K－IFRS. In addition to thesefactors, this paper used accruals quality as earnings quality in examining the effects of earningsquality on the value relevance of earnings and equity value. The sample is 3,325 firm－years selected from the firms(excluding financial institutions) listedon Korean Securities Market on the end of every year during 1999 to 2010. To examine the effects of earnings quality on the value relevance of earnings and equity value,this paper used price－accounting numbers model and analyzed whether the regression coefficientsof earnings and equity value are changed, whether the incremental explanation power(namely,   )of earnings and equity value is changed, and whether the coefficients of (earnings*accrualsquality) and (equity value*accruals quality) are changed as accruals quality is improved. The results are follows as expected. First, in the price－accounting number model, the coefficientof earnings is increased as accruals quality is improved, whereas the coefficient of equity value isdecreased. Second, the incremental explanation power of earnings is increased with accrualsquality, but that of equity value is decreased. Third, the coefficient of (earnings*accruals quality)is significantly positive with accruals quality, whereas the coefficient of (equity value*accrualsquality) is decreased. The results mentioned in the above shows that the value relevance of earnings and equity valueis increased with earnings quality, of which quality is improved with accruals quality that reflectsproperly the flow of cash flows.

Keywords

• accruals quality
• earnings
• book value
• value relevance

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