Changes in the Value-Relevance of Earnings and Book Values Over the Past Forty Years

Abstract

This paper investigates systematic changes in the value-relevance of earnings and book values over time. We report three primary findings. First, contrary to claims in the professional literature, the combined value-relevance of earnings and book values has not declined over the past forty years and, in fact, appears to have increased slightly. Second, while the incremental value-relevance of bottom line earnings has declined, it has been replaced by increasing value-relevance of book values. Finally, much of the shift in value-relevance from earnings to book values can be explained by the increasing frequency and magnitude of one-time items, the increasing frequency of negative earnings, and changes in average firm size across time.