Evolution in Value Relevance of Accounting Information

We find the value relevance of accounting information has increased between 1962 and 2014. The information we consider comprises twelve accounting amounts plus ten industry indicators. Regarding individual accounting amounts, we find that operating cash flow, cash holdings, and two New Economy-related amounts — recognized intangible assets and research and development expense — increase in value relevance, whereas dividends and, most prominently, earnings decrease. We also find that more accounting amounts become value relevant, which is consistent with a more complex relation between equity price and accounting information. There are marked differences in value relevance of individual accounting amounts for financial, technology, loss, and profit firms. Our findings are based on a non-parametric approach that automatically incorporates nonlinearities and interactions, thereby avoiding under-fitting that can constrain OLS estimation. Because OLS estimation with commonly employed interactions and nonlinearities overfits the data, thereby overstating value relevance, we measure value relevance using out-of-sample explanatory power.