Title

Price divergence from fundamental value and the value relevance of accounting information

Document Type

Journal article

Source Publication

Contemporary Accounting Research

Publication Date

Fall 9-1-2010

Volume

27

Issue

3

First Page

829

Last Page

854

Publisher

Canadian Academic Accounting Association

Keywords

Fundamental values, Market efficiency, R2s, Value relevance

Abstract

By employing two alternative measures of fundamental value, we reexamine the value relevance of accounting information over time. Consistent with some recent studies, we do not find evidence on the temporal decline in R 2s of conventional value-relevance regressions when the stock price is replaced by these measures as the dependent variable. Further, our results show that the divergence between fundamental value and the prevailing stock price (a) increases over time and (b) is associated with measures of noise trading and other arbitrage risks and costs. Additional analyses also reveal that proxies measuring the extent of noise trading increase over time. Overall, we do not find evidence that there is a loss over time in the value relevance of accounting information with respect to fundamental value. More importantly, we show that measures of price divergence are associated with noise trading as well as other arbitrage costs and risks (such as transaction costs and information uncertainty) that prohibit market prices from converging to fundamental values.

DOI

10.1111/j.1911-3846.2010.01028.x

Print ISSN

08239150

E-ISSN

19113846

Publisher Statement

Copyright © 2010 The Canadian Academic Accounting Association.

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Fung, S. Y. K., Su, L., & Zhu, X. (2010). Price divergence from fundamental value and the value relevance of accounting information. Contemporary Accounting Research, 27(3), 829-854. doi: 10.1111/j.1911-3846.2010.01028.x