The Value Relevance of Accounting Information: The Influence of Economic Conditions and Monetary Policy

Abstract

In this study, I examine the impact of economic conditions and monetary policy on the value relevance of accounting information. By reviewing the interaction of macroeconomic condition measures with earnings, the book value of equity, and cash flows from operations, the results show that the economic environment significantly affects the value relevance of accounting information. More specifically, I find that as the economy is improving the value relevance of earnings increases, while the value relevance of book value and cash flows decreases. Conversely, when the economy is heading into decline, the value relevance of earnings shifts to book value and cash flows, as asset quality and cash position become increasingly important. Collectively, these results support the view that value relevance is more nuanced and that the economic backdrop must be considered. I also incorporate the value relevance of fifteen distinct accounting values and examine the impact of forward-looking economic conditions and Federal monetary policy. I find that monetary policy is negatively related to value relevance; therefore, during expansive monetary policy, often surrounding a weak economy, value relevance declines. In the historic debate over the usefulness of accounting information, no prior study has performed a quarterly review of forward-looking indicators compared to contemporaneous economic measures and the future effects of monetary policy with a broad array of accounting values. These findings provide insight for future value relevance research and reveal that the economy significantly influences the value relevance of accounting information.