Disentangling Relevance from Reliability in Value Relevance Tests

Efrat Shust () and Dan Weiss
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Efrat Shust: The Department of Management and Economics, The Open University of Israel, Ra’anana 4353701, Israel
Dan Weiss: Coller School of Management, Tel Aviv University, Tel Aviv 6997801, Israel

Sustainability, 2022, vol. 14, issue 20, 1-15

Abstract: The literature shows that during the COVID-19 pandemic, the value relevance of earnings decreased. Traditionally, the literature measures value relevance using the relationship between stock returns and earnings. However, these tests are, in fact, “joint tests of relevance and reliability”. This caveat can distort the measurement of relevance, especially during the COVID-19 pandemic where the exceptional level of uncertainty could have affected relevance and reliability to different extents. This study disentangles reliability and relevance by extending the value relevance test. We use this extended test to examine firm categories in two dimensions: profits versus losses and intensive versus scarce use of accounting estimates. The results show that reliability and relevance are complementary when both are sufficiently high, but reliability has no significant impact on the usefulness of earnings when relevance is weak.

Keywords: reliability; relevance; value relevance; losses; accounting estimates (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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