Investigating the Impact of Structural Failure on the Value Relevance of Accounting Information

The purpose of the present research was to investigate the effect of structural failure on the value relevance of accounting information.

This is a quasi-experimental, post-event, and interdisciplinary study. Various econometric methods including multiple regression analysis with panel data econometric method, endogenous calculation of structural failures, and Wong's test-z were applied to determine the difference between the coefficients of the models. To measure and calculate the structural failure, the endogenous structural failure model proposed by Bay and Peron was used and to measure the value relevance of accounting information, the two variables of profit and book value in both price and return models were used.

The research findings indicated the existence of three valid structural failures during the research period.  Iran's capital market was suffering a structural failure during the time span of 2011, 2012, and 2017. It was also found that when a structural failure occurs, the value relevance of accounting information decreases. The value relevance of accounting information while ignoring structural failure is 16%. This figure reaches 37% if structural failure is taken into consideration. In addition, the findings of the research showed that due to the difference in the coefficients of determining the fitting patterns, the price pattern is more explanatory than the yield pattern in case of structural failure.

According to the achieved results, a structural failure has occurred in the capital market. When structural failure occurs, the value relevance of accounting information decreases. Having considered the structural failures, fitting models show different performances. By applying structural failure, the explanatory power of fitting models increased to more than twice its initial value. Therefore, it can be accepted that the value relevance of accounting information is influenced by structural failure. For this reason, paying attention to the phenomenon of structural failure makes the obtained results to be real and reliable.  It also makes it different from the case where structural failure is not taken into account. The models show different performances while considering the phenomenon of structural failures; hence, just considering accounting variables without structural failure events seems to be the simplification of the problem. This issue leads to an unfavorable effect on the interpretation of accounting information users to predict the results of the future economic activities of companies. Therefore, by ignoring the phenomenon of structural failure, linear models with constant parameters cannot explain the behavior of accounting variables efficiently. In other words, ignoring structural failures is in fact using an incorrect model. According to the results of the research, the price model shows a better explanatory power in studies compared to the yield model in case of structural failure. The research results suggest that increasing the reliability of the results in accounting research requires the implementation of regression and econometric models. The concepts and assumptions of economics and the fitting model based on structural failure should be used similar to the present study.