Financial Accounting in Brazil: An Empirical Examination

In this study, evidence of the value relevance of Brazilian accounting numbers over the periods 1995–1999 is presented. Brazil is a developing code law country, wherein Brazilian firms are financed by an “insider model,” i.e., they do not rely on capital markets and public credit markets to finance their operations. Brazil complies with four out of the five criteria that Ali and Hwang (2000) show to be negatively related to the relevance of financial accounting information. Based on this scenario, public financial accounting information is not expected to be value relevant in Brazil. Therefore, results show that, in terms of levels regression (prices as dependent variables), accounting seems to be reasonably value relevant (using R2 as a measure of value relevance). However, after controlling for scale effects, as suggested by Brown et al. (1999), the R2 is significantly reduced. In addition, the earnings-return relationship and the conservatism of earnings are examined. As previous research suggests (Leuz and Wustemann, 2003), the earnings-return relationship is weak in Brazil as well as the conservatism of earnings as expected, given previous research comparing code and common law countries (Ball et al., 2001). The results of the study also show that book values concentrate most of the value relevance on preferred shares.