The Impact of Recession on the Value-relevance of Accounting Information

The Global Financial Crisis of 2007-2008, and the subsequent global economic downturn, has heightened the need for research on whether the value-relevance of accounting information is impacted by periods of macroeconomic decline. In this study, we examine whether the occurrence of a recession impacts the value-relevance of two key accounting constructs: book value of equity and earnings. Consistent with our priors, we find that controlling for recession significantly increases the value-relevance of both the book value of equity and earnings. Our findings indicate the importance of controlling for recession in value-relevance studies. Sample periods that include recession events, and that do not incorporate such conditioning, may be mis-specified, with results difficult, if not impossible, to interpret.