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Article
Publication date: 1 August 2016

Mishari M. Alfraih

Anecdotal concerns expressed regarding developed capital markets suggest that the information provided in financial statements has lost its value relevance to equity…

Abstract

Purpose

Anecdotal concerns expressed regarding developed capital markets suggest that the information provided in financial statements has lost its value relevance to equity holders over time. The purpose of this paper is to investigate the issue from the perspective of Kuwait, which is a frontier market.

Design/methodology/approach

Consistent with prior research, the design employs the price regression model. A total of 2,490 observations were collected from all firms listed on the Kuwait Stock Exchange (KSE) over a period of 21 years (1994-2014).

Findings

Although this study documents a notable decline in both the value relevance of earnings and book value for equity holders over this period, the results suggest that the decline in the value relevance of earnings was deeper and more pronounced than that of book value.

Practical implications

Because a fundamental prerequisite for the value relevance of accounting information is the quality of the financial reporting environment, the results are useful for regulators because they provide an assessment of the effectiveness of the current financial reporting environment. The results highlight the need for improvements because higher-quality information helps equity holders to determine value more precisely. As the timely dissemination of financial statements is an essential ingredient contributing to the relevance of financial statements, a direct implication of the study’s findings for the management of KSE companies is that timely reporting of financial statements may mitigate the observed decline of the value relevance of financial statements produced by KSE companies.

Originality/value

This study contributes to the capital market research regarding changes in the value relevance of financial statement information through an empirical examination of a frontier capital market.

Details

Journal of Advances in Management Research, vol. 13 no. 2
Type: Research Article
ISSN: 0972-7981

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Article
Publication date: 2 December 2019

Hesham I. Almujamed and Mishari M. Alfraih

This purpose of this paper is to investigate the value relevance and incremental importance of earnings and book value in the Kuwaiti market to equity holders over time…

Abstract

Purpose

This purpose of this paper is to investigate the value relevance and incremental importance of earnings and book value in the Kuwaiti market to equity holders over time and in the context of the decade after the 2008 global financial crisis.

Design/methodology/approach

Following reports in the literature, the value relevance of earnings and book values was examined using the price valuation model provided by Ohlson (1995). Observations (2,817) were collected from all firms listed on the Kuwait Stock Exchange from 1994 to 2016.

Findings

The results suggest that the value relevance of earnings and book values declined over this period, and that the loss of value relevance for earnings data was greater than that for book value. The analysis provides evidence that the decline in value relevance of earnings and book value was driven by book values in the post-GFC period and suggests an exchange of value relevance between earning and book value post GFC.

Practical implications

The results are useful for regulators, analysts, investors and academics as an assessment of effectiveness of current financial reporting. There is a need for improvement because quality information helps equity holders determine value precisely. Timely financial reporting may mitigate the drop in value relevance of financial statements.

Originality/value

This is the first study to examine value relevance accounting measures of Kuwaiti companies, in the post-GFC context. It contributes to capital market research through an empirical examination of a frontier capital market.

Details

Journal of Financial Reporting and Accounting, vol. 17 no. 4
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 19 July 2011

Steve C. Lim and Taewoo Park

This paper aims to identify what drives the temporal reduction in the value relevance of earnings documented in the literature. Is it the increasing noise in stock returns…

Abstract

Purpose

This paper aims to identify what drives the temporal reduction in the value relevance of earnings documented in the literature. Is it the increasing noise in stock returns over time, noise in earnings, or both?

Design/methodology/approach

The authors develop hypotheses from the lead/lag structure between stock returns and accounting earnings and perform empirical tests using data from annual COMPUSTAT and monthly CRSP over the sample period of 39 years (1970‐2008).

Findings

The test results show that increasing noise in stock returns over time is primarily responsible for the temporal reduction of R2 in regressions of returns on earnings. Additional analysis shows weak evidence that both the noise in returns and the noise in earnings are responsible for the declining association between earnings and returns in a sub‐period (1970‐1982).

Research limitations/implications

The R2‐based methodology has limitations because, as Gu points out, regression R2s might be incomparable across samples. The findings suggest that future research should control for the effects of the temporal increase in market noise before making value relevance inferences from the declining association between earnings and returns.

Originality/value

The paper contributes to the limited body of research on noise in stock returns as the main driver for the temporal reduction in value relevance of earnings.

Details

Management Research Review, vol. 34 no. 8
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 20 March 2019

Hesham I. Almujamed and Mishari M. Alfraih

The study of developed capital markets suggests that information provided in financial statements has lost its value relevance to equity holders. The purpose of this paper…

Abstract

Purpose

The study of developed capital markets suggests that information provided in financial statements has lost its value relevance to equity holders. The purpose of this paper is to explore this issue in the emerging market of Qatar.

Design/methodology/approach

Following other studies in the literature, the study examines the value relevance of earnings and book values using the price valuation model provided by Ohlson (1995). A total of 215 observations were collected from all firms listed on the Qatari Stock Exchange over a period of five years (2012–2016).

Findings

This study suggests that the value relevance of both earnings and book values has noticeably decreased over the sample period. However, its results show that the decline in the value relevance of earnings favored book values.

Research limitations/implications

Like other studies, this one has limitations that suggest areas for future research. For example, in Qatar, like other emerging markets, a lack of data prevents the performance of deep analysis. Additionally, the authors only use Ohlson’s (1995) model as a framework for evaluation. It would be interesting to explore the changes when examining alternative valuation models. Another limitation is that the authors examine only two accounting measures: earnings and book values. Further research could explore changes in the value relevance of other measures, such as cash flow.

Practical implications

These findings provide empirical evidence regarding the value relevance of earnings and book values in an emerging market.

Originality/value

To the authors’ knowledge, this paper provides the first empirical evidence regarding the value relevance of earnings and book values in the emerging capital market of Qatar.

Details

EuroMed Journal of Business, vol. 14 no. 1
Type: Research Article
ISSN: 1450-2194

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Article
Publication date: 8 November 2018

Bismark Badu and Kingsley Opoku Appiah

This paper aims to examine the value relevance of accounting information from an emerging country perspective.

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1249

Abstract

Purpose

This paper aims to examine the value relevance of accounting information from an emerging country perspective.

Design/methodology/approach

The study adopts Ohlson (1995) Price model to examine the extent to which accounting information explain variation in stock prices of listed firms on the Ghana Stock Exchange.

Findings

The study reveals that earnings and book value of equity exhibit a positive and significant relationship in stock prices. Earnings explain higher variation in stock market values on the Ghana Stock Exchange compared to book value of equity. The study however finds that despite the introduction of the International Financial Reporting Standards in Ghana, the value relevance of book value and earnings have declined significantly over the period 2005-2014.

Research limitations/implications

A key implication is that regulators of capital markets, standards setters and accounting practitioners need to consistently improve upon the quality of financial reporting disclosures which will boost the confidence of users in their reliance on financial statements as the basis for choosing among alternative use of scarce resources. The authors adopted only the price model in testing the hypotheses. However, to provide comprehensive understanding of value relevance of accounting information, future studies can combine both the price and the return models.

Originality/value

The authors extend prior literature in the Ghanaian context with recent data. Finally, the study adds to the efficient market hypothesis by showing how share prices reflect accounting information produced by Ghanaian firms.

Details

Journal of Accounting & Organizational Change, vol. 14 no. 4
Type: Research Article
ISSN: 1832-5912

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Article
Publication date: 20 April 2020

Michela Cordazzo and Paola Rossi

Following the mandatory IFRS adoption in 2005, the Continental European accounting systems changed. This study investigates if it influenced the value relevance of…

Abstract

Purpose

Following the mandatory IFRS adoption in 2005, the Continental European accounting systems changed. This study investigates if it influenced the value relevance of intangible assets in Italy.

Design/methodology/approach

To measure the value relevance of intangible assets of non-financial firms listed on Borsa Italiana from 2000 to 2015, this study isolates the impact of several classes of intangible assets on stock prices and then classifies firms according to intangible asset intensity.

Findings

Goodwill, intellectual property and other rights, start-up costs or other intangible assets are significantly correlated with stock prices when Italian accounting standards were applied prior to 2005, whereas research and development expenditures are not associated with stock prices. The mandatory IFRS adoption has exerted positive effects only for goodwill and research and development expenditures, and it is negative for start-up costs. Further, when intangible-intensive firms are considered in the post-IFRS adoption period, declining value relevance exists relative to intellectual property and other rights or research and development expenditures; goodwill and other intangible assets increase in value relevance.

Research limitations/implications

This study is subject to country-specific determinants and firm-specific characteristics. It treats accounting standards as exogenous, and the classification reflects the concentration of intangible assets in an industry. By relying on investors’ assessments of risk, it does not sufficiently explore the risk conveyed by future abnormal earnings and earnings volatility.

Practical implications

This study offers insights for measuring and reporting intangible assets, by specifying that their value relevance depends on their level and aggregation.

Originality/value

This study investigates the value relevance of intangible assets in the post-IFRS period, in reference to intangible-intensive firms. It also divides intangible assets into several classes to specify the value relevance of goodwill.

Details

Journal of Applied Accounting Research, vol. 21 no. 3
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 26 August 2014

Xu-Dong Ji and Wei Lu

The purpose of this paper is to examine the value relevance of intangible assets, including goodwill and other types of intangibles in the pre- and post-adoption periods…

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4065

Abstract

Purpose

The purpose of this paper is to examine the value relevance of intangible assets, including goodwill and other types of intangibles in the pre- and post-adoption periods of International Financial Reporting Standards (IFRS). Most importantly, this paper investigates whether the value relevance of reported intangible assets is associated with their value reliability. Furthermore, this paper reports whether the adoption of IFRS improves the value relevance of intangible assets and alters the relationship between value relevance and reliability.

Design/methodology/approach

Both price and return models based on Ohlosn theory (1995) are employed to test the value relevance and value reliability of intangibles. Australian-listed firms with capitalised intangibles from 2001 to 2009 are selected in this study. The sample includes 6,650 firm-year observations.

Findings

The main result shows that capitalised intangible assets are value relevant in Australia, in both the pre- and post-adoption of IFRS periods. Value relevance is higher in firms with more reliable information on intangible assets. This study finds that the value relevance of intangibles has declined in the post-adoption period of IFRS. However, the positive relationship between the value relevance and the reliability of intangibles has remained unchanged in the post-adoption period.

Originality/value

The paper contributes a new measurement of value reliability of accounting information about intangibles. This paper is one of few studies on the relationship between value relevance and reliability of intangible assets. The results show that value relevance is positively associated with value reliability. This suggests that, when accounting standard setters assess whether the existing IFRS of intangibles should be improved in the future, they need to think not only in terms of whether the standard can provide more relevant information of intangibles to investors but also whether the standard can make the information of intangibles more reliable.

Details

Asian Review of Accounting, vol. 22 no. 3
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 4 April 2016

Oliver N. Okafor, Mark Anderson and Hussein Warsame

The purpose of this paper is to investigate whether financial information prepared and disclosed under International Financial Reporting Standards (IFRS) has incremental…

Downloads
2418

Abstract

Purpose

The purpose of this paper is to investigate whether financial information prepared and disclosed under International Financial Reporting Standards (IFRS) has incremental value relevance vs information prepared under generally accepted accounting principles (GAAP) in Canada.

Design/methodology/approach

The authors employ a difference in differences methodology and estimate value relevance using: first, the adjusted R2 of regressions of stock price on book value and earnings; second, the adjusted R2 of regressions of stock returns on earnings and changes in earnings; and third, a time series incremental association return estimation. The authors use multiple models including a model similar to the Ohlson (1995) model and a modified Balachandran and Mohanram (2011) model to investigate value relevance in the period 2008-2013.

Findings

The authors provide empirical evidence, based on unique Canadian environment, that accounting information prepared and disclosed under IFRS exhibits higher price and returns value relevance than accounting information prepared previously under local GAAP. Sensitivity analyses and yearly trends regressions produce collaborating evidence.

Originality/value

The study provides early empirical evidence that value relevance increases in mandatory IFRS adoption, based on unique Canadian adoption. The Canadian adoption is unique because Canada: first, is the first G7 non-European country to adopt IFRS; second, had pursued a dual strategy of harmonizing with the US GAAP while supporting IFRS convergence; third, provided information environment that mitigates the problems associated with measuring the effects of IFRS adoption in the European countries where IFRS or its predecessor – international accounting standards – had permeated the reporting environment prior to the mandatory adoption in 2005; and fourth, allowed firms listed on the US exchanges to continue to use or adopt the US GAAP for financial reporting and thus, provided a group of benchmark firms drawn from the same social-political and economic environment as the treatment firms. The study clarifies prior inconsistent results from European samples.

Details

International Journal of Managerial Finance, vol. 12 no. 2
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 23 November 2010

Panagiotis E. Dimitropoulos and Dimitrios Asteriou

The aim of this paper is twofold: first, it aims to examine the relevance of earnings and book values on stock prices, and second, to test for the effect of speculative…

Abstract

Purpose

The aim of this paper is twofold: first, it aims to examine the relevance of earnings and book values on stock prices, and second, to test for the effect of speculative intensity on the relevance of accounting information between 1995 and 2004.

Design/methodology/approach

The data were collected from a sample of 101 non‐financial firms listed at the Athens Stock Exchange over the period 1996‐2004 and were analyzed using OLS regression models.

Findings

Results indicated that book values are not relevant when they are considered solely, but both earnings and book values are more relevant when they are simultaneously included in the model. Finally, taking into consideration the effect of speculative intensity, we observed that it has a positive and significant effect on stock prices yet the value relevance of earnings and book values has not changed even after controlling for speculation.

Practical implications

The findings can be used by analysts and capital market researchers since both must bear in mind the fact that the quality of the capital market and the quality of the stock prices are not constant over time. Consequently, the classical valuation models are misspecified and could yield significant bias if speculative intensity is not taken under consideration.

Originality/value

The findings provide a further insight on the issue of accounting relevance within the context of an emerging capital market like Greece. According to our knowledge this is the first study which concerns speculation as an important factor of accounting value relevance in an European country.

Details

Journal of Applied Accounting Research, vol. 11 no. 3
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 12 March 2018

Ali Ahmadi and Abdelfettah Bouri

As an increasing number of business organizations around the world are engaged in the value relevance of accounting information, this study aims to assess the field of the…

Abstract

Purpose

As an increasing number of business organizations around the world are engaged in the value relevance of accounting information, this study aims to assess the field of the accounting value relevance of book value and earnings in share prices of banks and financial institutions listed in the Tunisian stock exchange.

Design/methodology/approach

Using a sample of available banks and financial institutions listed in the Tunisian Stock Exchange from 2010 to 2015, this paper accommodates the documented accounting information in an emergent market context by using stock price of three months after year-end as a dependent variable. This study uses the panel regression technique on 24 banks and financial institutions during the study period.

Findings

The authors find that earnings and book value are statistically significantly associated with firm value. Also, using these variables together is positively related to the firm stock price share. Comparatively, these obtain evidence that book value is statistically more value-relevant than earning per share models; expectedly, the earnings explain a higher proportion of the stock price for the group of financial institutions than the group of banks.

Originality/value

A Web-based search is performed during the second quarter of 2016, locating the corporate websites of the sample firms, and the official site of the Datastream (worldscope) is identified. The sample period is 2010-2015 (144 firm-year observations).

Details

International Journal of Law and Management, vol. 60 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

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