Content area
Full Text
This study examines the value relevance of earnings and Book values derived under the Kuwaiti accounting system that assures a complete compliance with the International Accounting Standards. Using, a valuation model provided by Ohlson (1995), the study uses statistical association between stock prices and both earnings and book values to measure value-relevance of the accounting system. The study also compares the incremental explanatory power of earnings and book values and examines some conditions under which earnings or book values would explain a relatively higher proportion of the variation of stock prices.
The results show that earnings and book values jointly and individually are positively and significantly related to stock prices. The incremental information content of earnings is greater than that of book values. Earnings become less value-relevant and book values more so as firms experience negative earnings. The best fit for the model was obtained for the industrial and food sectors followed by service and financial institutions. Earnings add more to the overall explanatory of the valuation model than book values for financial institutions, services, investments and real estate sectors; whereas book values have superiority only for the industrial sector.
The results of our study are generally consistent with the results obtained from U.S. and other developed markets except for the fact that the incremental information content of earnings is greater than that of book values.
INTRODUCTION
The objective of financial accounting and reporting is to provide users of financial statements with information that is useful for efficient decisions making. According to SFAC 1 (FASB 1978, par. 34), financial reporting should provide information that is useful to present, potential investors, creditors, and other users in making rational investment, credit, and similar decisions. A useful accounting system should produce information that is useful for decisionmaking. Investors are considered one of the most important group of decision makers that use accounting information and, therefore, it is important to investigate the extent to which accounting information values firms.
This study investigates the usefulness of accounting data (earnings and book values) in equity valuation in comparison with the total information in the market place using the data of listed companies in the Kuwaiti Stock Exchange. According to the Ministry of Commerce and Industry's Resolution No. 18 of...