The information content of New Zealand company profits: a Non-linear approach
Author: Mark Brimble
Abstract: Understanding the nature and extent of the relationship between stock returns and accounting information are of importance as this directly reflects the ability of accounting numbers to provide value relevant information. This study examines the value relevance of 103 New Zealand companies over the 1991-2003 period and is motivated by the relative lack of evidence in the New Zealand market with the little evidence that does exist suggesting the irrelevance of accounting earnings. Recent innovations in research methodology are applied in the New Zealand context including a nonlinear specification to control for temporary components within the accounting variables and controls for firm-specific characteristics such as firm size and the reporting of losses, which influence the information content of accounting numbers. The paper concludes that: (1) New Zealand company profits do possess value relevant information; (2) the existence of temporary components in the earnings streams of New Zealand companies influences the value relevance of New Zealand company information which can be controlled for by the use of appropriate non-linear regression techniques; and (3) both firm size and earnings sign effects are present in the New Zealand market.