Hypothesis Developments

D. Hypothesis Developments

Based on a literature review as described above, it can be formulated hypotheses below.

1. Value Relevance of Equity

Financial statement reflects the company's resources, the ow ner‟s claim to resources, and turnover of resources. The claim over resources consists of equity and creditor‟s right. The equity is the residual claim of the company‟s resources (Suwardjono, 2005).

Residual rights of shareholders or equity is reported in the balance sheet as book value of equity. Equity refers to economic value that has a positive effect on the company's market value (Ohlson, 1995; Suwardi, 2005; Sasongko, 2008). The hypothesis of value relevance of equity as follows (in alternative form):

H 1 = Equity positively influences on the company's market value.

2. Value Relevance of Firm Performance

Performance of the company resulting from the turnover of asset that builds the value-added of an enterprise. Company's performance reflected in net income. Chambers et al. (2007) stated that core earnings effect on the value of the shares in two ways, i.e. (1) effect on equity book value and stock market value dollar-for- dollar, and (2) an abnormal core earnings are capitalized and associated with the price of stock through the expected return. In conjunction with the company's market value, the hypothesis about the performance of the company as follows (in Performance of the company resulting from the turnover of asset that builds the value-added of an enterprise. Company's performance reflected in net income. Chambers et al. (2007) stated that core earnings effect on the value of the shares in two ways, i.e. (1) effect on equity book value and stock market value dollar-for- dollar, and (2) an abnormal core earnings are capitalized and associated with the price of stock through the expected return. In conjunction with the company's market value, the hypothesis about the performance of the company as follows (in

H 2 = Firm performance is positively influences on the company's market value.

3. Value Relevance of Other Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (OCI). OCI shows the performance of companies in addition to revenues and expenses are reported on the statement of net income. In current operating approach, OCI is reported on book value of equity as dirty surplus accounts. OCI has no effect on the company's market value especially prior to the adoption of accounting standards of comprehensive income (Chambers et al., 2007; Dhaliwal et al., 1999; Cheng et al., 1993) however it has effect after the adoption of IFRS (Chambers et al., 2007; Cahan et al., 2000).

Although there is conflicting evidence, the concept is that OCI influences on the company's market value (Johnson et al., 2005), therefore the hypothesis of OCI as follows (in alternative form):

H 3 = Other comprehensive income positively affects the company's market value.

4. Value Relevance of Dynamic Accounting Information

Dynamic accounting information is information that taken from the financial statement other than the book value of equity and net income, which is an asset or a liability. Various assets such as current asset (Ou, 1990; Lev and Thiagarajan, 1993; Seng and Hancock, 2012), fixed asset (Kerstein and Kim, 1995; Cahan et al.,

2000; Osborne and Ingles, 2003), and intangible asset (Sougiannis, 1994; Nelson, 2006; Camara, 2007) associated with stock prices.

4.1. Value Relevance of Current Operating Asset Growth. Current operating asset is needed to support and enhance the company's activity. Ou (1990) and Lev and Thiagarajan (1993) reported that the current operation asset was perceived as a stock of potential economic value that is not used yet. Current operating asset increases due to management can‟t allocate resources to more productive asset. Hypothesis of value relevance of current operating asset is (stated in alternative form):

H 4 = Company resource in the form of a growth of current operating asset negatively affects the company's market value.

4.2. Value Relevance of Fixed Asset Growth. Capital expenditure shows that management believes on investment opportunities in order to increase the prosperity of the company. Osborne and Ingles (2003) stated that investment can only improve welfare if it represents one of four conditions as follows. First, forms

a new asset. Second, adds to the existing asset. Third, replaces an old asset. Fourth, increases the useful life or capacity of the old asset. Therefore hypothesized of value relevance of fixed asset growth is (written in an alternative form):

H 5 = Company resource in the form of fixed asset growth positively influences on

the company's market value.

4.3. Value Relevance of Intangible asset. Intangible asset consists of research and development cost, promotion, new product development, goodwill, and patents. Intangible asset has contingency effect because the asset is deferred expense 4.3. Value Relevance of Intangible asset. Intangible asset consists of research and development cost, promotion, new product development, goodwill, and patents. Intangible asset has contingency effect because the asset is deferred expense

H 6 = Company resource in the form of intangible asset positively influences on the company's market value.

5. Impact of Conservatism on the Value Relevance of Accounting Information

Conservatism recognizes income (asset) delayed until there is strong evidence that the transaction occurred but the loss (expense) are recognized immediately, so that the income (asset) is lower than economic income (asset). There is different between cash inflow and recognition of asset based on accrual basis. Presentation of understatement distorts the financial statements figures.

5.1. Impact of Conservatism on the Value Relevance of Equity. The book value of common equity and earnings determine stock prices, if one of the two values is lost leading to the misspecification model (Kothari and Zimmerman, 1995; Ohlson, 1995). Conservatism cause the book value of asset (income) is lower than the economic value. As a result, earnings are transitory and book value of equity presents the core value (Dichev, 2008; Balachandran and Mohanram, 2011). Investors pay more attention to the book value of equity. Therefore, the hypothesis of the impact of accounting conservatism on the value relevance of equity as follows (written in alternative form):

H 7 = Conservatism strengthen the value relevance of equity.

5.2. Impact of Conservatism on the Value Relevance of company performance. Earning as company performance is the movement of the resources that generate added value for owners. It provides information to predict future cash flow. Conservatism resulting mismatch between the recognition of revenues and expenses, so that the earning downward bias. Net income as accrual basis is lower than cash flow. Earnings that contain a lot of transitory items are negatively responded by investors. Therefore, the hypothesis of the accounting conservatism that influence the value relevance of the company‟s performance as follows (written in an alternative form):

H 8 = Conservatism weaken the value relevance of the company's performance.

5.3. Impact of Conservatism on the Value Relevance of Other Comprehensive

Income. Other comprehensive income (OCI) shows the company's performance other than net income. OCI affects in predicting the company's value depends on the location of it (Chambers et al., (2007). In this study, OCI quoted from the book value of equity, therefore the OCI character similar to the book value of equity. Conservatism will increase the relevance of dirty surplus items. Hypothesis on influence of conservatism to the value relevance of the OCI as follows (written in alternative form):

H 9 = Conservatism strengthen the value relevance of other comprehensive income.

5.4. Impact of Conservatism on the Value Relevance of Current Operating

Asset Growth. Current operation asset contains the value that is persistent, presents of future information of the return (Dichev, 2008). In a conservative condition, the value of current operating asset shows downward bias. Therefore, the Asset Growth. Current operation asset contains the value that is persistent, presents of future information of the return (Dichev, 2008). In a conservative condition, the value of current operating asset shows downward bias. Therefore, the

H 10 = Conservatism weaken the value relevance of the growth of current operating asset.

5.5. Impact of Conservatism on the Value Relevance of Fixed Asset Growth. Expenditures for capital (fixed asset) are in line with company growth. In a conservative condition, fixed asset reported less than its economic value. Therefore, the hypothesis of conservatism impact on the value relevance of fixed asset growth can be formulated as follows (written in alternative form):

H 11 = Conservatism weaken the value relevance of the growth of fixed asset.

5.6. Impact of Conservatism on the Value Relevance of Intangible Asset. Intangible asset is resource that is most difficult to measure because of the contributions to the prosperity of the company is difficult to be measured. In a conservative condition, intangible asset is reported lower than its economic value. Management is faster expensing intangibl e asset, so that it‟s downward bias. Hypothesis of conservatism impact on the value relevance of intangible asset can

be formulated as follows (written in alternative form):

H 12 = Conservatism weaken the value relevance of intangible asset.