The Effect of Market Efficiency on Value Relevance of Accounting Information

Assessing value relevance of accounting information is one of the matters that has attracted much attention in the accounting literature. An interesting question in this regard is whether measures of value relevance are materially affected by market efficiency. Using the procedure introduced by Aboody et al. (2002), we examine the impact of market efficiency on the estimation of coefficients in value relevance regressions. We apply the introduced procedure to two types of studies that have attracted much attention in the accounting literature: 1) the value relevance of earnings and book values, and 2) the value relevance of accruals and cash flows. In doing this, we used a sample of 121 firms listed in Tehran Stock Exchange during the period of 2004-2010.
We compare coefficient estimates obtained from conventional value relevance regressions with those from regressions based on the procedure introduced by Aboody et al (2002), and find statistically significant differences in both price and return regression coefficient estimates. The result indicates that the market efficiency has affected value relevance of accounting information.