A Valuation Based Analysis of the Spanish Accounting Reforms

This paper contrasts the association between security prices and accounting information before and after the Spanish accounting reforms. Spanish regulations were changed during 1989 and 1990 so as to conform with EU requirements, bringing them broadly into line with international standards, although the new system still focuses on compliance with rules rather than reflecting the substance of economic transactions. We model security price as a function of two fundamental accounting variables -- book value of equity per share and earnings per share. The model is estimated using a sample drawn from non-financial companies listed on the Madrid Stock Exchange during the period 1986--1995. Whilst the results demonstrate only a modest improvement in value relevance of accounting information following the reform, they show that the influence of the earnings variable becomes somewhat smaller whilst that on equity is increased. This is consistent with earnings containing a larger proportion of transitory elements following the reform, whilst the equity value appears to have more economic relevance than previously.