CentER

Yue Wang

Abstract:
Standard setting bodies and investors are interested in the relevance and the use of financial accounting information in firm valuation. Currently reported income is not necessarily equal to the clean surplus income, which is defined as the periodic change in a firm's shareholders' equity except for the change that arises from transactions between the firm and its owners, because firms can book some accounting flows directly to equity and keep them out of the income statement. Clean surplus income is the summary performance measure under the clean surplus relation and hence effectively is a measure that could compete with reported income for both equity valuation and contracting purposes. This thesis intends to add empirical evidence to a recently heavily debated regulatory issue, the necessity of promoting a clean surplus income statement. I document the magnitude, and assess the relevance of dirty surplus accounting flows in European member states. In particular, this thesis evaluates the features of dirty surplus accounting flows, and clean surplus income, in terms of their relevance to stock returns, their persistence, and their use in forging accounting conservatism.

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