ABSTRACT

It is frequently argued that using fair value rather than the traditional historical cost method in preparing financial statements would give better information on a company’s current and future performance, and would increase the value relevance of financial statements, providing a better basis for management decision-making (see Chapter 4). This assertion raises questions regarding the link between accounting income or book values and the company’s market value. While several studies (e.g. Lev 1989) reveal such links based on traditional financial statements, they also show that these links are complex and far from stable over time. The Ohlson (1995) model and the FelthamOhlson (1995) model (see also discussion in Chapter 5) may be considered as a sort of culmination of research on the subject. In this model, market value is dependent on book value, a multiple of abnormal operating earnings, an adjustment related to the conservatism principle and the effect of ‘other information’ (such as R&D disclosures). While various studies validate the model and demonstrate the usefulness of traditional financial statements, this does not preclude the relevance and possible superiority of accounts presented totally or partially in fair value.