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JUNE 2011<br />

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 2<br />

book value of the firm (Amir and Lev, 1996; Brennan, 2001; Holland, 2003). Consequently,<br />

non-recognition of IC increases the information asymmetry amid firms and the users of<br />

financial reports (Byrnes and Derhovanesian, 2002; McNamee, 2001; Reed et al., 2002). In<br />

order to determine whether non-recognition of IC decreases the relevance of accounting<br />

information (earnings and book value) this <strong>paper</strong> intends to investigate the effect of<br />

recognition of IC on accounting information (earnings and book value). Accordingly, the<br />

hypothesis states that:<br />

H<br />

1 = recognition of IC increases the relationship between market price with relevance of<br />

earnings and book value.<br />

To determine the effect of recognition of IC on the relevance of earnings, book value and<br />

market price, H 1 is subdivided into two new sub-hypotheses related to the different<br />

dimensions of IC:<br />

H 1 a<br />

= recognition of IC increases the relationship between market price with relevance of<br />

earnings.<br />

H<br />

1a1= recognition of human capital increases the relationship between market price with<br />

relevance of earnings.<br />

H = recognition of structural capital increases the relationship between market price<br />

1a2<br />

with relevance of earnings.<br />

H<br />

1a3<br />

= recognition of capital employed increases the relationship between market price with<br />

relevance of earnings.<br />

H 1 b<br />

= recognition of IC increases the relationship between market price with accountimg<br />

information (relevance of earnings and book value).<br />

4. Conclusion<br />

Researchers have been contending that the traditional financial statement provides<br />

only limited information pertaining to the relevance of earnings to investors due to the nonrecognition<br />

of IC (Collins et al., 1997; Francis and Schipper, 1999; Lev and Zarowin, 1999),<br />

and non-recognition of IC at the same time increases the gap between market value and book<br />

value of the firm (Amir and Lev, 1996; Brennan, 2001; Holland, 2003). Recently, application<br />

of GAAPs and accounting standards has led to the decrease in relevance of earnings as well<br />

as non-recognition of IC (Amir and Lev, 1996; Brennan, 2001; Holland, 2003; Lev, 2001).<br />

This suggests that IC has significant impact on financial information especially to firm<br />

earnings. In this very context, researchers, practitioners, and accountants are required to<br />

resolve this long standing issue by extending the horizon of research, which measures IC.<br />

COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 1661

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