Has traditional accounting information lost its relevance?

Abstract

Purpose This paper aims to examine whether traditional accounting information has lost its relevance in the context of sub-Sahara Africa. Specifically, the study examines whether historical cost and inflation-adjusted data are related to the market value of equity and stock returns on the Ghana Stock Exchange (GSE). Design/methodology/approach The authors collect firm-specific data from annual reports of 20 listed firms from the GSE over the period 2007-2012. The authors use ordinary least squares and two stage least square (2SLS) to examine the value relevance of historical and inflation-adjusted income and equity. Findings The results suggest that the market equity is related to both historical-cost and inflation-adjusted earnings. Market return is also associated with both historical-cost and inflation-adjusted earnings and book value. Overall, the authors conclude that inflation-adjusted information content is more value relevant than the traditional cost accounting information. Research limitations/implications The findings are a wake-up call to policymakers and practitioners in formulating financial reporting policies. This study, however, focuses on only non-financial listed firms on the GSE. Thus, the results may not be valid for all companies in Ghana. Practical implications The finding has an implication on the choice of valuation used in the preparation and reporting of financial statements. Accordingly, the authors offer policy directions to financial reporting regulatory authorities to enhance the value relevance of accounting information. Social implications Regulators, especially the GSE may improve life of investors if the recommendations are transformed into directives that will help enhance the quality of financial reporting. Originality/value The findings suggest that inflation-adjusted data are more relevant in countries with extreme inflationary trend and lax International Financial Reporting Standards compliance enforcement. The results also lend support for the current cost accounting theory.