The usefulness of earnings information and investor classes during the period of balance sheet approach

Abstract

This study examines the effect of the shift in accounting conceptual framework on the usefulness of earnings information. In Thailand the conceptual framework was issued in 1999 which followed the International Accounting Standard (IAS) and oriented to the balance sheet approach. Prior to 1999, the model of financial reporting was based heavily on the income statement approach. This study finds the insignificant differences in the usefulness of earnings information between these two approaches and finds no decline trend usefulness of earnings information. The usefulness of earnings information is measured by earnings response coefficient around the earnings announcement date. The examination of the usefulness of earnings of each investor class under the period of balance sheer approach is to test the hypothesis thar if earnings are useless, institutional (sophisticated) investors should rely less on earnings information. However, the finding shows that trading of institutional (sophisticated) investors around earnings announcement dates exhibits the greatest association with earnings information while the lowest for individual (unsophisticated) investors. The greatest ERC for sophisticated investors attests to the usefulness of earnings information under balance sheet approach. following the replacment of historical cost accounting with fair value accounting under balance sheet approach, the values of assets and liabilities more closely mirror their economic value. This study finds that book value provides more incremental value relevance that earnings in the period of balance sheet approach.