Journal of International Accounting, Auditing and Taxation 15 (2006) 72–91 Longitudinal value relevance of earnings and intangible assets: Evidence from Australian firms John Goodwin a , Kamran Ahmed b,∗ a School of Accounting and Law, RMIT University, Melbourne, Australia b School of Business, La Trobe University, Melbourne, Australia Abstract Recent U.S. studies report that earnings value relevance has declined over time. Some authors suggest non- recognition of intangible assets in the U.S. is a major reason for declining earnings value relevance. However, the evidence is mixed on the effect of non-recognition of intangible assets. To examine this conjecture, this paper examines earnings value relevance for Australian firms since Australian GAAP has not prohibited intangible asset recognition. Using a variety of established models and specifications, our results indicate that for the average firm, there is weak evidence of decline in earnings value relevance. However, firms that capitalize intangibles have increasing earnings value relevance. Further, the magnitude of the difference in earnings value relevance between capitalizing firms and non-capitalizing firms is most pronounced in the latter part of the 1990s and this difference is increasing. © 2006 Elsevier Inc. All rights reserved. Keywords: Longitudinal earnings value relevance; Intangible assets; Australian GAAP 1. Introduction Studies in the U.S. have documented that the value relevance of earnings has declined over the last few decades as measured by the extent of association between either share price or share returns and accounting earnings (see for example, Brown, Lo, & Lys, 1999; Chang, 1998; Collins, Maydew, & Weiss, 1997; Ely & Waymire, 1999; Francis & Schipper, 1999; Lev & Zarowin, 1999). 1 Lev and Zarowin (1999) attribute this decline to the lack of proper recognition of intangibles in the financial statements by U.S. companies. Recent studies have documented ∗ Corresponding author. Tel.: +61 3 9479 1125; fax: +61 3 9479 3278. E-mail address: k.ahmed@latrobe.edu.au (K. Ahmed). 1 This is the conclusion when returns regressions are estimated. The evidence is mixed when price ‘levels’ regressions are estimated. For example, overall Francis and Schipper (1999) report mixed evidence about changing value relevance of earnings and book value. However, they report that earnings value relevance has declined significantly using a returns 1061-9518/$ – see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.intaccaudtax.2006.01.005