Economic Uncertainty and Value Relevance of Accounting Information

Abstract

Uncertainty, unlike risk, is hard to be predicted and measured. When economic uncertainty increases, it becomes difficult for policy makers and investors to respond and come up with the ambiguous economic situation. The uncertainty not only reduces consumption, investment and employment but also increases volatility of stock price. As an example, recent COVID-19 has increased uncertainty in the global economy. Governments have tried to resolve the uncertainty through active monetary and financial policies, but these policies are not successful but result in widening the gap between the real market and capital market. A few economists recently have developed economic uncertainty index to diagnose and resolve the economic difficulties. They applied textual analysis to measure the index using mass media articles and economic reports of EIU(Economic Intelligence Unit). This study investigates whether the uncertainty affects the value relevance of accounting information using WUI(World Uncertainty Index) developed by Ahir et al. (2018). The results show that EPS and BV of equity lose their value relevance significantly as economic uncertainty increases during the period from 1999 to 2020. The value relevance of accruals and operating cash flow also decrease significantly during high uncertainty period although they have different characteristics. These results show that the economic uncertainty lowers the usefulness of accounting information. © 2022, Korean Accounting Association. All rights reserved.