Disentangling Relevance from Reliability in Value Relevance Tests

Efrat Shust, Dan Weiss

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The literature shows that during the COVID-19 pandemic, the value relevance of earnings decreased. Traditionally, the literature measures value relevance using the relationship between stock returns and earnings. However, these tests are, in fact, “joint tests of relevance and reliability”. This caveat can distort the measurement of relevance, especially during the COVID-19 pandemic where the exceptional level of uncertainty could have affected relevance and reliability to different extents. This study disentangles reliability and relevance by extending the value relevance test. We use this extended test to examine firm categories in two dimensions: profits versus losses and intensive versus scarce use of accounting estimates. The results show that reliability and relevance are complementary when both are sufficiently high, but reliability has no significant impact on the usefulness of earnings when relevance is weak.

Original languageEnglish
Article number13449
JournalSustainability (Switzerland)
Volume14
Issue number20
DOIs
StatePublished - Oct 2022
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2022 by the authors.

Keywords

  • accounting estimates
  • losses
  • relevance
  • reliability
  • value relevance

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