Abstract

This study aims to investigate the impact of the pandemic-induced economic uncertainties on the relevance of earnings among European firms. Using the explanatory power approach, we ascertain the change in explanatory power as a measure of a change in value relevance of earnings before and during the pandemic. Alternative methodology involving the use of an interaction term is used to ensure the robustness of the results. Results obtained from both approaches indicate a decline in the relevance of earnings amid the pandemic. Further analysis also indicates that loss-making firms observed a higher decline in the value relevance of earnings during the pandemic relative to profit-making firms. The findings also reveal that though both large and small firms experienced a decline in the value relevance of earnings, nevertheless, the magnitude of the decline is greater for small firms relative to large firms. In addition to investigating the accounting effect of Covid-19, this study adds to the limited research available on the impact of economic uncertainty induced by the pandemic on the capital markets. It also complements the literature on how the quality of financial information is affected during crisis.

Key words: Covid-19 pandemic, earnings, value relevance, capital allocation, Europe.