Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: Hard evidence from Zimbabwe

We examine the relative and incremental value relevance of inflation-adjusted (IA) and historical cost (HC) amounts in a hyperinflationary economy. Using an innovative setting and a unique dataset drawn from annual reports of firms listed on the Zimbabwe Stock Exchange for the 2000-2005 period, we find that both sets of amounts are value relevant, but HC amounts are superior to IA amounts. We also show that inflation gains and losses provide incremental information content beyond that provided by the HC amounts and that the power of this incremental content model is equivalent to that of the HC model but superior to that of the IA model. Furthermore, we find that during the period of relatively low inflation, HC amounts are more value relevant than IA amounts, but the differences are less discernible during the period of relatively high inflation. Our analyses further show that the value relevance of both IA and HC amounts increases with the inflation rate, but the increase is greater for IA amounts. Finally, we show that HC amounts have a greater ability to predict future cash flows than IA amounts, which suggests that the superiority of the value relevance of HC amounts relative to that of IA amounts stems from their ability to predict future cash flows. Overall, our results suggest that in periods of relatively low inflation, HC amounts are more value relevant, while in periods of relatively high inflation, the two sets of amounts are equally value relevant and provide incremental information beyond that provided by the other.