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Stock prices and accounting information: evidence from Malaysia

Scott Pirie (International Graduate School of Management, University of South Australia, Adelaide, Australia)
Malcolm Smith (School of Accounting, Finance & Economics, Edith Cowan University, Joondalup, Australia)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 18 July 2008

Abstract

Purpose

As one of the main purposes of financial statements is to provide relevant information for investors, relationships between share prices and accounting variables have been widely researched. Early studies focus mainly on earnings, but attention has turned in recent years to valuation models that include the book value of the equity. Many of these studies cite the residual income model as their theoretical base and, with the growing emphasis on shareholder value, residual income measures are more commonly used in the business community to track financial performance. Given such trends, the purpose of this paper is to review the theoretical background of the residual income model and discuss results of empirical studies that use it.

Design/methodology/approach

The study seeks an understanding of how published accounting information relates to share prices in the developed market in Asia, outside Japan. More specifically, the study aims to extend the international literature in market based accounting research by examining empirical evidence on relationships between share prices and the two summary accounting variables of equity book value and earnings for firms listed on the stock exchange in Malaysia.

Findings

The findings imply that, the two accounting variables summarising the balance sheet and the income statement, respectively, are significant factors in the valuation process, and that managers are justified in using the accounting system as a primary source of information for monitoring financial performance.

Originality/value

These findings should be of interest to other researchers, and to managers and investors who currently use or are planning to use residual income to monitor business performance.

Keywords

Citation

Pirie, S. and Smith, M. (2008), "Stock prices and accounting information: evidence from Malaysia", Asian Review of Accounting, Vol. 16 No. 2, pp. 109-133. https://doi.org/10.1108/13217340810889924

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited