The Role of Accounting Information in Corporate Valuation Processes

Abstract

This research investigates the role of accounting information in corporate valuation
processes through a novel methodological lens that integrates principles from computational linguistics and network theory. Traditional valuation research has predominantly
focused on the predictive power of individual financial ratios or earnings metrics. In
contrast, this study proposes and validates a holistic framework that conceptualizes a
firm’s entire set of disclosed accounting data as a complex, interconnected information
network. We argue that the value-relevance of accounting information is not merely a
function of specific line items but emerges from the structural properties and relational
dynamics within this network. Our methodology involves parsing annual financial
statements into discrete informational nodes and modeling the explicit and implicit
relationships between them using graph-theoretic constructs. We then extract novel
metrics, such as informational centrality, coherence density, and explanatory path efficiency, to quantify the overall quality and integration of a firm’s accounting disclosure
ecosystem. Applying this framework to a longitudinal dataset of SP 500 firms from
1995 to 2004, we find that these network-derived metrics significantly enhance the
explanatory power of valuation models beyond traditional accounting fundamentals.
Specifically, firms with more coherent and centrally organized accounting information
networks exhibit lower valuation errors, reduced analyst forecast dispersion, and attenuated market mispricing around earnings announcements. Furthermore, we identify a
nonlinear relationship where the marginal benefit of additional accounting disclosure
diminishes and can become negative if it excessively increases network complexity
without improving coherence. These findings offer a paradigm shift from evaluating
accounting information based on isolated components to assessing its architectural integrity, providing new tools for investors, standard-setters, and auditors to evaluate
the true decision-usefulness of financial reports.