Table 8 shows the multiple regression results of the relationship between marketvalue and both earnings levels and book value. The pooled cross-section and time-series regression, as well as, the year-by-year regressions produce similar results. Both EPS and BV are positive and significant at the 1% level in most cases. In any event, the empirical findings are consistent between the return and price models, in which we have a strong evidence that accountinginformation is value relevant in the Egyptian stock market. However, when we compare our results with the literature, we observe that the accountinginformation in Egypt has relatively more valuerelevance with those reported in sophisticated and large emerging markets (see for example; Landsman, 1986; Barth, 1991; and Shevlin, 1991; Amir et al.1993; Harris et al. 1994; Barth and Clinh, 1996; Chan and Seow, 1996; Graham and King, 1998; Chen et al. 1999; and Balbalyan 2001). This might be due to the fact that competing information sources such as earnings forecast, firm research by financial analysts, management conference calls, etc. are far less prevalent in Egypt.
Habib and Elhamaney (2009) adopt the Pope and Wang’s (2004) residual income specification instead of the commonly used Ohlson model to asceratain the valuerelevance of accountinginformation in Egyptianequitymarket. The study was drawn up from financial statements of 88 firms as of the year end 2005. Their result shows a positive correlation between cash flow and equitymarket values in Egypt. They further state that when the model estimation is based on earnings components of accounting accruals, the valuation weight of abnormal earnings goes up by about a factor of three in order to make up for the negative correlation between accounting accruals and equitymarket values. This supports the study major findings that accounting accruals are value relevant.Kirkulak and Balsari (2009) analyse the effect of inflation adjusted data on explaining the marketvalue of equity and stock returns in Turkey. They find that both historical cost-based book value and earnings information and inflation adjusted information are value relevant and they complement each other.
Earnings predictability (or predictive ability) refers to the extent to which a firm’s past earnings is associated with its future cash flows, with banks that have highly predictable earnings possessing higher earnings quality. Predictability is a desirable qualitative characteristic of accountinginformation. Prior research finds that entities with more predictable earnings have higher analyst forecast accuracy and lower risk premium in capital markets because higher predictability is seen as a vehicle for increasing transparency of financial information (Graham, Harvey, & Rajgopal, 2005). Since capital market participants can predict future earnings more readily for entities with more predictable earnings, the uncertainty surrounding their earnings tends to be lower and this translates into lower cost of capital (Affleck-Graves, Callahan, & Chipalkatti, 2002; Crabtree & Maher, 2005). Unlike non-financial firms, banks are more sensitive to issues of transparency and uncertainty due to the inherently opaque nature of their operations (Diamond, 1996), growing complexity of operations, and their dependence on large degree of leverage. Investors are interested in information regarding the types and maturities of bank deposits in relation to those of loan portfolios. Fair values of assets and liability financial instruments provide valuable information on bank liquidity and risk.
Second, it examines the valuerelevance of a simultaneous addition of reported accounting and macroeconomic factors using a sample of ﬁrms listed on two different European Stock Exchanges – Germany and the UK – in the three years immediately before and after the transition to IFRS. The end date was prior to the 2008/09 ﬁnancial crisis and so avoids any possible distortion that this upheaval may have had on selected ﬁrm performance indicators. These two jurisdictions comprise a strongly contrasting pair that epitomise extremes of established bank and market-based economies respectively in the European Union (EU). In the UK and other common law countries, ﬁrms deal with other external parties such as institutional and minority investors at “arms-length” leading to demand for accurate and timely information on ﬁrm ﬁnancial performance measures (Ball, Kothari, & Robin, 2000). By contrast, in Germany and other code law countries, insider owners such as banks participate in ﬁrm decision-making through supervisory board membership. As such this provides them with direct access to ﬁrm performance information. Our research complements the studies by Ball et al. (2000) and Daske and Gebhardt (2006) who explored the other beneﬁts of IFRS adoption. They noted that a reduction in measurement error following the introduction of IFRS should encourage investors to rely less on “other information” sources.
Panel A (second column) of table 3 presents results for each year in the investigated period, the mean market-adjusted return on each accounting hedge portfolio (%). The value 19.4 in below ∆EARN for year 2002 means person could earn 19.4 percent net market-adjusted (long position minus short position) in year 2002 if sign of earning changes was used to construct a portfolio. Since this is more than zero it can be concluded that earning changes is relevant for investors to make well- informed decisions. A comparison of these numbers, ∆EARN (19.4%), ∆ROE (15.1%) and ∆CFP (- 4.4%) for year 2002 shows that cash flow information isn’t relevant for investors in making investment decisions while earnings and ROE information are relevant for investors. This also indicates present earning with (19.4%) is more relevant than the ROE with (15.1%). The value 58.1 under ∆EARN for year 2002 as % mkt ratio indicate that about 58.1% of the total perfect foresight returns are available to investors with advance knowledge of the sign of the earnings change.
The main purpose of this study was to investigate the effects on valuerelevance, incurred and arising from the influence of accounting standards in an environment wherein strong and secure protection mechanisms for shareholders exist. The accruals accounting had been used as the careful handling of accounting directives, in order to explore the valuerelevance of accountinginformation in the financial statements. Three measures of performance, namely, net profit, return on equity and returns for this purpose were used to investigate the relationship between accruals accounting and the valuerelevance. We hypothesized those valuerelevance measures which are positively affected in an extremely widespread environment where the use of accruals accounting is adopted, within the existence of strong and secure protection mechanisms of shareholders. Our results fully supported the hypothesis and determined that the Malaysian regulators provided quite a strong and well- fortified protection structure for shareholder. Therefore, the financial information provided by Malaysian companies is inclined towards valuerelevance and intensely reliable aspects. Hence, the attraction of Malaysian stock exchange market, ‘Bursa Malaysia’, for both local and international investors, is obviously the source of interest and a magnetic feature, as well.
An empirical study on valuerelevance with the aim of comparing German GAAP and IFRS carried out by Schiebel (2007) by using listed companies on the Frankfurt Stock Exchange. The results show that German GAAP is statistically more relevant than IFRS. Mousa and Desoky (2014) examined the valuerelevance of IFRS using the case of Gulf Co-operation Council (GCC) countries, Bahrain. The research adopted two models: Stock return model and price earning model. The stock return model showed a minimal difference in the valuerelevance of accountinginformation post- IFRS adoption while the price earning model showed improvement in the valuerelevance of accountinginformation after the adoption of IFRS. In Nigeria, Umoren and Enang (2015) examined the effect of IFRS adoption on the valuerelevance of financial statements of Nigerian listed banks. Ohlson model was adopted for the research work. It was found out that both book value for equity and EPS became more value relevant after IFRS adoption which was confirmed theoretically by Mohammed and Lode (2015). Adzor and Abanyam (2014) examined whether investors’ perceive financial statements as important in stock valuation and whether IFRS adoption has led to a marginal increase in the valuerelevance of financial statements in Nigeria. Ohlson model was adopted. The result indicated that there is a positive relationship among EPS; book value of equity and SP and the valuerelevance of accountinginformation have improved after the adoption of IFRS.
alue relevance research is motivated by the fact that listed firms use financial statements as one of the major medium of communication with their shareholders and public at large. Market usually depends on financial reports prepared by the management of such firms. For making the financial reporting to be effective, information contained in the financial reports should be relevant and reliable (Barth et al., 2001). Information is considered to be relevant when it influences the users’ decisions to form predictions or help in confirming or correcting the past evaluations, while, it is considered reliable if can be depended upon to faithfully represent the transactions or events that it aims to represent without any undue error or bias (FASB, 1976). According to Barth et al. (2001) a value relevant information should have both the features of relevance and reliability. The value of a firm is based on what the market perceives about its performance, and accounting disclosures provide the essential information so as to form the basis of such perception. Many studies have examined the valuerelevance of earnings per share (EPS), book value of equity per share (BVPS), and cash flows. Such studies have reported that earnings and book values have significant information content for equity valuation of a firm (e.g., Dechow, 1994; Cheng et al., 1996; Pfeiffer et al., 1998; Holthousen and Watts, 2001; Choi et al., 2006; Kwon, 2009). Earnings and book values are considered more value relevant for firm’s valuation than cash flows, as cash flows usually have severe matching and timing problems (Ohlson, 1995; Barth et al., 1998; Collins et al., 1999). Studies have also suggested that the valuerelevance of earnings and book values move inversely to one another, and that decline in valuerelevance of earnings is accompanied by increase in value
Design/methodology/approach – The rationale for such a conjecture stems from the fact that after the adoption of international accounting standards, energy distributors were unable to register regulatory assets and liabilities concerning their activities. Besides, the same hypothesis was also evaluated for Canadian electricity incumbents. The inclusion of the Canadian companies in this study was the result of the permission given by the IASB, through IFRS 14, so that adopters of international standards from 2015, could continue to register the regulatory items. Findings – Using a valuerelevance model it was possible to conclude that there was a reduction in the relevance of the accountinginformation in the Brazilian case and that this decrease is very potentially related to the write-off of regulatory assets after IFRS. It was also observed that the same effect did not occur in the Canadian companies after the adoption of this normative set. It was also verified that before the IFRS, both the regulatory assets of Brazilian companies and of Canadian firms, were from the statistical perspective also incorporated into the marketvalue of the companies analyzed, denoting similar behavior on the part of investors.
The IFRSs are standards set by the International Accounting Standards Board (IASB) responsible for monitoring the preparation of financial statements worldwide. Before IFRS came into being, many countries had their own local accounting standards issued by their accounting bodies (Okpala, 2012). Gordon, Loeb and Zhu (2012) opined that financial statements’ preparation in line with IFRS enhanced the transparency of financial information and thus improving the valuerelevance of the affected companies. This indicates that IFRS adoption will give investors more assurance on the financial statements since they have been prepared in line with the international standards. Valuerelevance of financial information therefore is one of the measures used to determine accounting quality. According to Vishnani and Shah (2008), valuerelevance implies the ability of financial information contained in the financial statements to explain how the stock market is measured. A value relevant variable is that amount in the financial statements that guides investors in the investment decision.
Abstract The paper examines whether company’s characteristics, namely, stockholders number, listing status and company’s age affect its accountinginformationrelevance and which stock price measure, among average price, closing price and after three months price, is more dependable in pointing out the accountinginformationvaluerelevance for a sample consists of 91 companies in the services and industrial sectors in Jordan within 2004-2013. Using price model, it is found that companies with larger stockholder numbers, listed on Amman Stock Exchange primary market, and that are older in age yield greater valuerelevance for per share earnings and book value. Book value has the greatest valuerelevance being the best predictor for firm value, while cash flows showed insignificant results. Finally, we concluded that closing price is the most dependable among the three stock price measures in detecting the accountinginformationvaluerelevance in Jordan. The paper presents the ability of valuation theory/model to interact with other theories by including the effect of non-accountinginformation on the accountinginformationvaluerelevance. Our findings might present evidence that can serve the educational institutions in their courses and provide a guideline to investors, managers and financial analysts to better summarize the firm value .
Effects of IFRS adoption were also examined from many aspects of Turkish firms. Balsari and Varan (2014) provide a comprehensive literature review on IFRS related literature in Turkey between 2005 and 2014. Their overall assessment reveals a positive impact of IFRS adoption on Turkish capital markets. Employing event study method, Gürarda (2013) analyzes the market reactions to adjusted earnings of ISE-30 firms after the IFRS adoption. Adıgüzel (2017) reports decreases in accrual management and increases in earnings quality upon IFRS adoption by Turkish firms. Valuerelevance of financial information in pre and the post-IFRS period was relatively more heavily examined for Turkish firms. Balsari, Özkan and Durak (2010) investigate the impact of IFRS adoption on the earnings conservatism and conclude that IFRS adoption has increased both the timeliness and earnings conservatism. Kargin (2013) analyzes the impact of IFRS adoption on the relevance of book value and earnings and her results reveal an improved valuerelevance in the post- IFRS period. Suadiye (2012) analyzes the impact of IFRS adoption on the valuerelevance of earnings and book values of equity and concludes that IFRS adoption increased the valuerelevance of accountinginformation for Turkish listed firms. The review of empirical studies by Balsari and Varan (2014) concludes that IFRS adoption improved valuerelevance and accounting quality for Turkish listed companies. Türel (2009) is another paper examines the valuerelevance of IFRS for Turkish firms and he confirmed that the valuerelevance of earnings and book value of equity had increased significantly after IFRS adoption.
Corporate governance practices are recognized as one of the most important implications to build market place confidence and to attract positive investors in the organization. Promoting good corporate governance practices is considered to be very important in attracting investment capital, reducing risk and developing firm performance. This research investigated the impact of corporate governance on value-relevance of accountinginformation in Sri Lanka. The recent spate of corporate collapses around the world has put significant pressure on policy makers and corporate management to initiate and implement good corporate governance practices. From an academic perspective, corporate governance is an extensively researched area in the literature on accounting (Cohen et al., 2004). However, the impact of corporate governance on the value-relevance of accountinginformation remains unexplored. Agency theory arguments support the view that better structured governance mechanisms should result in better quality financial reporting in the market place.
There are two models commonly used to assess valuerelevance, the price model, and the returns model. The price model is used to test the relationship between stock price and book value (Ohlson, 1995). This model offers a model which connects marketvalue with earnings and book value. In this model, current earnings serve as a proxy for abnormal earnings, while book value is a proxy for the present value of expected future normal earnings. Ohlson's model expresses a firm's marketvalue (stock price) as a linear function of earnings, book values, and other value-relevant information. The model has many requirements and provides a useful benchmark for conceptualizing how marketvalue relates to accounting data and other price-relevant information. The statistical association between stock price and earnings and book value used as the main metric for measuring relevancevalue of accounting number. If accounting variables have valuerelevance for investors, then there will be an association between stock price and earnings and book value. Additionally, earnings and book value coefficient will statistically be significant. This association measured by the explanatory power (R²) of the regression model. The model is specified as follows:
Two existing studies are devoted to investigating the value-relevance of CAS versus IAS-based accountinginformation to overseas investors (B-share investors) in China. However, they provided conflicting evidence. Haw et al. (1998) reported that information based on Chinese GAAP is value relevant and the reconciliation to IAS has limited value to overseas investors in the B-share market. They also found significant incremental information content of IAS reconciliation for H-share traded at the Hong Kong Stock Exchange. Their results suggest that the same accountinginformation may have varying degrees of value-relevance in different markets. However, Bao and Chow (1999) examined the relative valuerelevance in equity valuation of two sets of accountinginformation of Chinese B-share listed companies and provided opposite evidence. Their findings showed that earnings and book value reported based on IAS have greater information content than those based on CAS, and the results of yearly regression analysis generally suggest that the explanatory power of these earnings and book values for share prices increase over time. They also suggested that a plausible explanation of their findings is that Chinese regulation requires a company’s dividend distribution to be based on the lower profits reported in two sets of financial statements according to different accounting requirements. Since earnings based on IAS are significantly lower than those based on CAS, they are more value relevant for dividend decisions and thus more useful for equity valuation.
The purpose of financial accounting is to satisfy the users’ needs of financial information that is helpful in decision making. Therefore, managers prepare and present financial statements, which represent the main source of information. According to IASB (1989), the objective of financial statements is to provide useful information about financial position, performance and changes in financial position of a firm. The usefulness of accountinginformation have been constantly expressed in the literature by the term “valuerelevance”, which measures the utility of accounting figures from the perspective of equity valuation (Beisland, 2009). Watts and Zimmerman (1990) described this concept as “information perspective”, which views financial statements as a provider of information for the valuation models. The valuerelevance reflects the main function of accounting, which relates to the supplying of useful information that enables investors to value securities and make rational decisions (Dumontier & Labelle, 1998). The objective of valuerelevance research is to relate financial statement figures to a measure of firm’s value and, to assess the relation of such information to the determination of value (Dahmash & Qabajeh, 2012). The valuerelevance measures the ability of financial statements to capture and summarize information that is reflected in firm’s value (Francis & Schipper, 1999). Under this concept, to be value relevant, accountinginformation must be associated with the current company value.
Licensed under Creative Common Page 821 In Nigeria, Adebimpe and Ekwere, R. (2015) empirically examines whether mandatory adoption of IFRS has improved valuerelevance of accountinginformation of listed commercial banks in Nigeria stock exchange. The study covered a period of 2010 and 2011 (as pre-adoption period) and 2012 and 2013 (as post-adoption period) and reported that equityvalue and earnings of banks determined under IFRS are relatively value relevant to market share prices than under Nigerian SAS (old accounting standards).They also found earnings per share to be incrementally value relevant during the period of post-IFRS and book value per share is incrementally less value relevant during the post-IFRS period. Consistent with recent work of Yusuf, A.M and Asma, L.N.(2015) which discussed conceptually concerning adoption of International Financial Reporting Standards (IFRS) by Nigerian financial institutions. They concludes that with the mandatory adoptions of financial reporting under IFRS by all listed financial institutions, the accounting disclosures become more value relevant among Nigerian financial institutions. Another study conducted by Muhibudeen, L. (2015) in Nigeria concluded that following adoption of IFRS in Nigeria improved valuerelevance of earnings and book value. These studies highlight the weakness of NGAAP compared to IFRS similar to the study of Umoren and Enang (2015).Contrary to the results from Adebimpe and Ekwere, R. (2015); Umoren and Enang (2015); Yusuf, A.M and Asma, L.N. (2015); Zayyad, B, Ahmad and Mubaraq, S. (2014).
Providing information that is useful for various investors in decision- making is the primary objective of financial statements (Dimitropoulos & Asteriou, 2010). Van Beest, Braam, and Boelens (2009) explain that the provision of high-quality financial information about economic units and the usefulness of economic decision-making are the primary aims of financial reporting. Indeed, nobody can deny the significance of financial reporting. In other words, financial reporting quality is described as the accountinginformation usefulness to the users of that information (mostly named as investors and creditors). The Conceptual Framework of Financial Accounting Standard Board (FASB) (SFAC No. 2) is the initial example of this description in 1980 (Jonas & Blanchet, 2000). Providing high-quality financial reporting information that aids investors and other stakeholders to make good decisions in investment, credit, and similar resource allocation is important and enhances the efficiency of the overall market (Norwani, Mohamad, & Chek, 2011) as the quality of financial reporting can efficiently enhance the allocation of resources in capital markets. Moreover, the quality of financial information can help investors, analysts, owners, and regulators to make decisions about the valuation of public firms (Mashayekhi & Abadi, 2011). The quality of financial reporting also influences the investor’s point of view about future firm performance (Norwani et al., 2011). For these reasons, financial statements are expected to have a high level of quality with respect to the information they contain.
Many studies have been and continue to be conducted in several developed countries to observe the relationship between earnings attributes and Cost of Equity (Francis et al., 2004; Wong, 2008; Petruska, 2008; Chan et al., 2009; Pae et al., 2005; Lara et al., 2010; Li, 2010) still there is a need to re-examine this matter in developing countries in view of the fact that earning is recognized as significant accountinginformation for investors to guide them in making rationale and profitable decisions. To have a more clearer picture it can be said that, in an environment where information is already rich, any additional information disclosed by companies may not have much effect on decision-making process on investors and may not significantly affect the CoE. However, Malaysian market is a good platform to investigate disclosure issue where the legal system and capital market are well developed (Mohamad et al., 2007) but the accountinginformation environment is not rich (Ball et al., 2003). In addition, there is prevalent doubt in literature on the notion where conservatism of earnings leads to reduction of the CoE. Francis et al. (2004) reported that there is no association between conservatism of earnings and CoE. While, the findings reported by Lara et al. (2010), Li (2010), Petruska (2008) and Wong (2008) advocated that conservatism of earnings has a negative effect on CoE. Therefore, this study makes an attempt to enrich the conservatism of earnings literature, and investigated the relationship between conservatism of earnings and CoE.
Through the regression of the estimated cost of equity capital of Spanish firms on a set of test variables concerning accountinginformation, market influence and mandatory IFRS adoption, we have found that risk parameters show a significant and positive effect on stocks’ expected returns. If the firm’s beta increases then there will be also a rise in the firm’s cost of equity capital. Similarly, firms showing a higher financial leverage are associated to a riskier profile and, thus, investors required higher returns to invest in their stocks. Therefore, there is consistent evidence that financial leverage does not only shows a positive influence on shareholders return on equity, but it also has a significant effect on firms’ cost of equity capital by increasing the discount rate of future cash flows and, thus, dropping the stocks’ value for investors. This discount rate importantly concerns firms’ financial policy and it influences capital markets’ performance, as a little shift in its value has a huge effect on a firm’s stocks marketvalue and on firm’s capability to create value.