• The Effect of SFAS No.34 on the Value-Relevance of Earnings and Equity Book Value

Abstract

The fair value based recognition and measurement of financial instruments required by SFAS No.34 in Taiwan, which is effective for 2006 and latter annual reports, provides an even more nteresting context for examining investor perceptions of the value-relevance changes in accounting numbers for listed firms regulated by this new standard. This study refers that the income statement impact of SFAS No.34, resulted by the fair value changes of held-for-trading financial assets and financial liabilities, would be taken as a noise impounded in the current earnings and, thus, impair earnings persistence. Alternatively, the same treatment of this standard, which is applied for financial instruments, should make equity book value approach its intrinsic value. The combination of these SFAS No.34 effects will make investors rely more (less) heavily on equity book value (earnings) in setting stock prices of firms regulated by this new standard. Based on such inference, this study predicts that SFAS No.34 adoption will make the value-relevance of equity book value (earnings) increases (decreases). The empirical results provide solid supports to this prediction. These results remain robust to the various sensitivity tests.

Keywords: SFAS No.34, Fair Value of Financial Instrument, Value-Relevance, Earnings, Equity Book Value