The value relevance of dirty surplus accounting flows in The Netherlands

Recently the Dutch financial reporting standard setters have taken steps to make dirty surplus accounting flows more visible to parties outside firms, either by eliminating their possibilities or by requiring comprehensive income-type statements. These steps are presumably based on the idea that dirty surplus accounting flows are relevant to investors and hence have to be visible to them. Whether dirty surplus accounting flows are indeed relevant in firm valuation is an empirical issue. This paper, therefore, explores both the incremental and relative value relevance of dirty surplus accounting flows for the Dutch listed firms in the period 1988–1997, when their existence was relatively unhindered. We find consistent evidence that both reported income and clean surplus income are relevant in explaining stock returns, though reported income seems a more relevant measure of returns in the period considered. The results suggest that aggregated dirty surplus flows are not associated with stock returns with accumulation intervals up to 10 years; however, asset revaluations and currency-translation differences are at times incrementally relevant to returns.

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