Research Methodologies in Accounting Abstract

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ResearchMethodologies in Accounting


Thepaper sought to study the value relevance of earnings, as well asbook worth in the restaurant industry for the last 20 years. Thestudy mostly used the findings of Collins,Maydew and Weiss as a benchmark and improved on the same. The variouschanges witnessed on the value relevance and book value in the pasttwo decades were reviewed and also various accounting models used tostrengthen the study.Various regression models were used to assessthe different variables. Sample for the study was obtained fromCOMPUSTATand CRSP databases. It was found out that the two variables are bothrelevant forecasters of price in the gathered sample and inapproximately each sample. Inferential statistics were also used toanalyze and interpret the data with the help of statistical software(SPSS). Nonetheless, there exists a gap in the research, which can beeliminated by conducting further studies on the topic.

ResearchMethodologies in Accounting

Valuerelevance is an essential topic in accounting research in manyindustries. As the name suggests, it addresses the relevance offinancial statements information to users. In the past, studiesemphasized on earnings but the latest incorporate book value.Explorations on the relationship between share price or return andthe financing variables have been conducted and same or varyingoutcomes done. In the last two decades, studies have analysed theeffect of earnings and book value on share price. The data content ofaccounting numbers in determining security prices or returns is amongthe most vital issues in accounting and finance. The primary aim offinancial statements is to provide factual and fair view of anorganization’s operations and financial state. In case there is norelationship between value of a firm and numbers in financialstatements, such reports are said to possess no relevance. The ideaof financial statements loosing relevance means that no one will beinterested in them. As a result, the empirical research on valuerelevance of accounting data is an immediate check of the reliabilityand validity of financial statements published by organizations.


Forthe last 20 years, many cross-country value relevance studies havebeen carried out by various corporate governance systems (Pervanand Bartulovic 181).Particularly, the scholars regard that variances in financialgovernance systems result in disparities in value relevance ofaccounting data. Studies have illustrated that value relevance inaccounting is not being practiced in nations with continentalcorporate management systems characterizedby a rigid financial orientation in increasing external equity.

TheBasis of Association Studies

Financialaccounting can broadly be acknowledged to consist of two functions.First, it is based on the agency theory and aimed at controlling theconnection between an organization and its stakeholders (Müller2).In such a context, the accounting is pegged on calculation factorsand provides evidence. The second correlates with the provision ofinformation enabling investors to accept the value of an entity. Thatis, by applying the different financial and accounting signs, theshareholders can value an organization’s shares, which give themthe opportunity to either sell or buy stocks in the markets. Thereare some criticisms of the latter function, for example, being basedon false principles, the information is quite late and renderedobsolete it is a complicated system, enabling many subjectivedecisions by the management. One can easily doubt whether theexplanatory accounting power indicators may essentially helpinvestors have an idea or approximate the value of the company. Torespond to such doubts and criticisms, a lot of research paperstermed ‘value relevance studies’ have been done.

TheOrigin and Objective of the Value Relevance Studies

Eventhough the term ‘value relevance’ only appeared in scholarly workback in the 90s, studies conducted to display the relation betweenaccounting figures and company value started more than four decadesago. The first journal in this field was published by Miller andModigliani in 1966 where they utilized a sample of enterprises in theelectricity sector. They illustrated that capitalization of earningson the statement of financial position is necessary in marketvaluation. Nonetheless, other researchers acquired the right to beregarded as the inventors of value earnings explorations on financingfigures. Ball and Brown researchedthe relevance valueby assessing the market price reaction and the volume of transactionfollowing the publication of yearly reports.

Priceand Return Models

Invalue relevance, accountingand book worthequityin the hospitality industry uses two main methods of valuation, thatis,price and return models. Regardless of their similar theoreticalbasis, their results are at times inconsistent. Normally, in theabsence of a well-articulated valuation postulates, the return modelis strongerand reliable than the price one. The twomodels are considered complementary, fiscally, they are all equal andthe return model deemed less challenging. However, the criticism doesnot bar the model to hold.

BookValue and Value Relevance of Earnings

Researchon value relevance tendsto give mixed results in various economic sectors such as therestaurantindustry. Employing return models and information from variousmarkets, studies reveal that value relevance and book value aresignificantly insignificant in other areas like the wirelesscommunication industry. The incremental value of earnings is reducedwhile that of book value rises in the service sector, while a weakcorrelation exists between the two accounting variables and marketvalues.

Utilizingthe price model, earnings are essential in the United Statescompanies than in Europe’s service sector. Book value has a highervalue relevant than earnings in the United Kingdom’s servicesectors and Australian organizations. The valuerelevance of book value has increasedin theKoreanandIndonesian restaurant industrieswhereas earnings have been non-essential. Both book value and valuerelevance of earnings are very important in the Asian markets whilefew explorations have reviewed the value relevance of the financinginformation applying the price and return model.

Transitionsin Value Relevance over Time

Astudy done by Collins,Maydew and Weiss hadthree basic findings(39-67).First, they established that the integrated value relevance ofearnings, as well as book worth has not gone downin over three or four decadesindeed, it seems to have somewhat risen duringthat time. Besides, the risingvalue relevance of earnings has decreased and taken over by anincreased value relevance of book values in the course of fourdecades. Third, they imply that a huge proportion of the changes invalue relevance from earnings to book values is attributed to therising essence of first-time elements, the risen occurrence ofadverse earnings and transitions in mean company scope andnon-physical degree with time. Nonetheless, many related studies havereviewed crucial issues associated with shifts in the value relevanceof earnings and book worth.It was found outthatthere wasadropin the value relevance of earnings from 1978 all through to 1996.Other scholars have pointed out that negative earnings and uniqueitems have negatively affected the value of relevance earnings overtime. Studies have further found out that the restaurant industry hasa higher probability to document losses with timethatcan compromise the relevance of earnings. Even though otherexplorations have recorded a reduction in value of relevanceearnings, others revealed that the book values are highly relevantthan earnings when failures are imminent or earnings incorporateuniqueitems. Therefore, can be due to the fact that the book valueacts as the stand-in for an organization’s abandonment amount orsince book values are well placed to foreseelong termreturns if theexisting ones have many short run components. In other studies, itwas ascertained that equity quantity is a crucial element of earningsand book value, where its functioning relies on respectiveamounts ofearnings and book value. The amalgamated value relevance of earningsand saleshasbeen rigid and the value of relevance of earnings has gone downwhereas the effect on the cost of revenues is constant. The valuerelevance of earnings is more whenever there is an economiccontraction particularly iflongrunearningsestimate is factored in the theoretical framework and they Simply,many researches have mainly revealed that earnings and book valuesare inversely related.

RestaurantIndustry and Value Relevance Accounting and Book Value

Theindustry has been in place for a longtime it ismature and boasts constant,as well aspredictable cash flows. However, the persistent innovation in theindustry for the last two decades has made it hard for financialexperts to project future cash flows. Thereason for this is theincreased application of the Internetfor various functions. It means thatitis not easy to predict the direction of the industry due to the rapidmovement of technology. Whenone contrasts theindustrywith electric utilities, the latteris a unique scenariosince they are controlled by Federaland state government and are supposed to particular requirements.Consequently, in this special situation, earnings are a function ofan organization’sassets. A sector explained by rapid transformations like therestaurant industry implies that the earnings are described bystrategic measures taken by the management or accounting team(s).


Theformer regression for the research illustrates price as a function ofvalue relevance earnings and book value, (Collins, Maydew and Weiss39-67):


WhereP is the cost of every share, E is the EPS BV represents the bookvalue for each stock, and isany other fundamental information. The book value and expositoryearnings power can be disarranged by disintegrating theaggregateinstructivepower to two portions as shown:

and (2)


Next,the paper tries to find outif the value relevance of earnings andbook values has transformed for the last two decades by regressingthe R-squared values from the first, second, and third equations on atime dummy component as illustrated:


WhereTIME equals to 20 years. The descriptive power declines if is highly negative. Since the primary aim of this study is to examinevalue relevance of earnings and book value in the last 20 years inthe restaurant industry, a dummy variable is going to be substitutedinto the equation as follows:


WhereRES represents the restaurant industry.


Thesample for the research is all the information accessible fromCOMPUSTAT and CRSP. Different restrictions associated with dataaccessibility are applied. Earnings, book value, price, and stockdata are entirely needed to be acquired from COMPUSTAT database.Then, overall assets and shareholders’ equity should not beadverse.


Theearnings and book value are relevant forecasters of price. Theadjusted R-square in the regression shows that the earnings and bookvalue in conjunctiondescribe about 58.9% of the difference in shareprices in the restaurant industry. This outcome may be likened to theinferences by Collins et al.’s that earnings and book valuemutually describe approximately 54% of the difference in price for agathered sample encompassing 20 years (1953-1993)(39-67). To factordirect comparisons to authors’ study, the research regressed thevalue for a similar period. The R-square value of 0.59 is lower thanthat obtained by Collins et al. of 0.75 for similar period. Thet-statistic of earnings in this assessment of 10.775 is not near the(Collins, Maydew and Weiss 39-67) earnings of t-statistic of 34.89.In this research, the t-statistic for book value of 9.702 is lowerthan Collins, Maydew and Weiss of 56.66 (39-67). Since the twodecades that the study examined is shorter than that explored byCollins et al., the findings for every year are relayed one after theother (39-67). The results in this study imply that the book valueprovides significant increasing descriptive power aboveearnings.Nonetheless, the findings of the research cannot affirm Barton,Hansen and Pownall’sprecisefindings for the financial services industry(753-789).


Onthe other hand, inferential statistics involve reaching conclusionsthat go past the existing data only. That is, it is used to makedecisions of the probability that an observed variance between groupsis independent or dependent. Some of the primary inferentialstatistics essential in experimental or quasi-experimental researchstudy are the t-tests, analysis of variance (ANOVA), Covariance, andregression analysis among others (Fritzenschaft16).


ThePearson Correlation between ESP and BV was positive (0.591). It meansthat as one of the variables, let’s say, ESP increases in value,the BV also rises. Likewise, as ESP decreases in value, BV alsoreduces. As such, it is termed a positive correlation. Therefore, wecan conclude that as the value earnings increase, the book value alsorises. Similarly, the correlation between the book value (BV) and theadjusted stock price (Adjprc) is positive suggesting that as theprice increases, the book value also rises and vice versa. The Sig(2-tailed) value for all the variables in the correlation table isless than 0.05. Consequently, one can state that there exists a greatcorrelation between the three variables (ESP, BV, and Adjprc). Thatis, any decreases or increases in a single variable do greatly relateto changes in the second and third variable.


TheAnalysis of variance table illustrates if there is a statisticallysignificant variance between the various group means. It can be seenthat the significance value is 0.000 in other words p=.000. It canbe said that exists a statistically significant variation in the meanrelevance and book value. Therefore, it may be said that the changein the value relevance has an impact on the book value in therestaurant industry.


Thecoefficients table depictsinformation on confidence viawhich theestimates‘t’ and ‘Sig.’ may be reinforced. It may be seenthat all the variables contain a value of ‘Sig.’ being less than0.05, and thus, itmay be concluded that the values in column ‘B’are not false with a confidence level of 95%. Anassessment of thevariables in terms of the level of confidence, for example, thecoefficient for ESP is above the confidence level of 95%. Equally,the BV coefficient is also greater than the confidence level(BV&gt0.05) and hypothetically would fall in the rejection region ina two-tailed test.


Insummation, this study is a small upgrade of Collins et al.’sresearch by examining the value relevance of earnings and book valuein the restaurant industry for the last 20 years. The paper furtherexpounds study by analyzing the impacts of the variance between valuerelevance of earnings and book values in the mentioned industry.Various primary findings must be realized. First, this researchascertains Collins et al.’sdiscovery that the application of valuerelevance and book values have not significantly diminished. Second,the studydepicts a risein the additional value relevance of earningswhereas the value relevance of book value ispartially unchanged.Third, an analysis of the datareveals that there is no greaterdifference in value relevance of earnings and book values across therestaurant industry. Finally, findingsof the study reaffirm theassumptions of Collins et al. which points out that accounting forhistorical costs is crucial.

Varioussetbacks in the study were encountered. First, the difference in thelevel of observations with the information present can bring forththe issue of bias to unknown economic scenarios. Furthermore, thedata obtained from CRSP and COMPUSTAT for the study appeared to bequite low or adverse in several cases than anticipated, which to someextent led to the book values being higher than value relevantearnings. Next, the restaurant industry is broad meaning that it washard to determine which area under the sector the study should focus.Finally, the sample time assessed in this research is different fromthat applied in the Collins et al.’s thus, may lower the value ofimmediate comparisons between the two explorations. The researchappeared lacking, and therefore, raised questions for futureresearch. Future studies should try to find out if the recordedtransitions in value relevance with time are because of the policyreforms established by concerned bodies and authorities.Additionally, there is a possibility that the variables utilized inthis study are insufficient or do not fully explain the problem.

Extraexplorationswould further supplement transformations in fiscalleverage to the postulations in the research since changes arerelevant past the accounting earnings. In addition, (Mbagwu,Entwistle and Feltham 261-288) affirmed that GAAP EPS are valuerelevant, though they advocate that additional studies must employI/B/E/S or pro forma EPS since they are as important as the generallyaccepted accounting principles earnings. Furtherinvestigation maydetermine the underlying features incorporating cash flows thatshareholders consider as value relevant rather than emphasizing onthe value relevance of earnings and book value. Lastly, applyingreturn models to the price models to further analyze variances invalue relevance in the restaurant industry may broadened theresearch.


Thestudy reviewed the value relevance of earnings and book value in therestaurant industry for two decades. The restaurant industry has beenin existence for so many years and prides itself of constant cashflows as a result of a large clientele. Nonetheless, the everchanging accounting principles and technology for the last 20 yearshas rendered it impossible for accountants and finance gurus toforecastlong run cash flows. From the analysis, it is clear thatvalue relevance is an integral concept in accounting research in manysectors, especially in the restaurant industry. Value relevance ofearnings deals with the relevance of financial statement data toaccountants and other users. Past studies focused on earnings whilethe current ones include book value. Studies on the relation betweenshare price and the financing factors have been done and varyingresults obtained. It is explicitfrom the literature reviewthat thetwo variables are imperative predictors of price despite undergoingsmall changes for the past 20 years. Various earnings and book valuemodels were included in the study to aid in understanding their rolein the restaurant industry.

Thesample for the research was all the data obtained from COMPUSTAT andCRSP. The data obtained was subjected to a statistical analysis. Thestudy used inferential statistics, which involved reachingconclusions that go past the existing data only. That is, it was usedto make choices of the probability that an observed variance betweengroups is independent or dependent. Some of the primary inferentialstatistics essential in experimental or quasi-experimental researchstudy are the t-tests, analysis of variance (ANOVA), Covariance,regression analysis among others.The study was a slight upgrade of Collins et al.’s research byassessing the value relevance of earnings and book value in therestaurant industry in the last 20 years regardless of the variouslimitations realized.


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Collins,Daniel W., Edward L. Maydew, and Ira S. Weiss. &quotChanges intheValue-Relevance of Earnings and Book Values overthe Past FortyYears&quot.&nbspJournalof Accounting and Economics&nbsp24.1(1997): 39-67.

Fritzenschaft,Tim.&nbspCriticalSuccess Factors of Change Management: An Empirical Research in GermanSmall and Medium-Sized Enterprises., 2014. Print.

Mbagwu,Chima, Gary M. Entwistle, and Glenn Feltham. &quotThe ValueRelevance Of Alternative Earnings Measures: A Comparison Of ProForma, GAAP And Analysts Actuals*&quot.&nbspJournalof Accounting, Auditing &amp Finance, 25(2),(2010) 261-288.

Müller,Christian.&nbspConfirmingDividend Changes and the Non-Monotonic Investor Revision of EarningsPersistence.Wiesbaden: Imprint: Springer Gabler, 2014. Print.

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