Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: hard evidence from Zimbabwe
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We examine the value relevance of inflation-adjusted (IA) and historical cost (HC) amounts in a hyperinflationary economy. Using a unique dataset drawn from annual reports of firms listed on the Zimbabwe Stock Exchange from 2000 to 2005, we find that both sets of amounts are value relevant but HC amounts are superior to IA amounts. We also show that inflation gains and losses provide incremental information content beyond that provided by the HC amounts and that the power of this incremental content model is equivalent to that of the HC model but superior to that of the IA model. Further analyses indicate that, in periods of relatively low inflation, HC amounts are more value relevant, while in periods of relatively high inflation, the two sets of amounts are equally value relevant. Finally, we show that HC amounts have a greater ability to predict future cash flows than IA amounts, which suggests that the superiority of their value relevance stems from this.
KeywordsIAS 29 Historical cost amounts Inflation-adjusted amounts Value relevance Hyperinflationary economies
JEL classificationG15 M40 M41
We appreciate the invaluable comments and suggestions made to earlier versions of this paper by the anonymous reviewers and the manuscript editor, Professor Stephen Penman. We are also grateful to participants at the 2011 Southern African Accounting Association Conference in George, South Africa, 2014 African Accounting and Finance Association Conference at Stellenbosch University, South Africa, and seminar hosted by the Accounting, Governance and Risk Research Group at the Nottingham Business School, Nottingham Trent University, UK, for the helpful comments and suggestions. We also acknowledge the research assistance by Shingirai Changunda and research funding award from the University Research Committee, Faculty of Commerce Block Grant, University of Cape Town.
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