Journal of Economic Info Vol. 1, No.

3 (2014) 6-9

Journal of Economic Info (JEI)

ISSN:2313-335X
www.readersinsight.net/jei

Value relevance of accounting information and its impact on stock

prices: Case study of listed banks at Karachi Stock Exchange
Khurram Shehzad1*, Aisha Ismail2
1,2
Department of Management Sciences, COMSATS Institute of Information Technology, Abbottabad, Pakistan

* Corresponding author: [email protected]

Abstract ARTICLE INFORMATION

This study primary investigates the value relevance of accounting information in banking sector of Received: 16 May 2014
Pakistan. The study employed the pooled regression technique on nineteen private banks from the Revised: 13 July 2014
period of 2008 to 2012. The findings show that earning per share is more value relevant than book Accepted: 25 July 2014
values, while accounting data explains a high proportion of the stock price. The relevant information
is such that it influences the economic decisions of users by helping them evaluate past, present DOI 10.31580/jei.1i3.109
and future events.

Keywords: Value Relevance, Earnings per Share, Book Value per Share, Accounting Information © Readers Insight Publication

Introduction Investors to understand the factors affecting to companies stock price

anticipated the trend of price changes and company value changes and
Value relevance is defined as “the ability of accounting numbers accordingly make necessary decisions to buy or not to take stock. In
to summarize the information underlying the stock prices, thus the this study, company’s share has been used as multiplying ending
value relevance is indicated by a statistical association between share value in the number of outstanding shares. Financial decisions
financial information and prices or returns’’( Liu & Liu 2007 p.56). of any corporations is dependent upon accounting information
The value relevance literature deals with the usefulness of financial produced by the accounting system, then on the basis of information
statement information in equity valuation, i.e., how well do available the finance managers are able to make decisions about
accounting figures measure value? What accounting figures can be company’s future. The investors’ decisions to buy or not to take stock
used to predict value attributes? These research questions are also depend upon this accounting information.
addressed in this study. The more investors use accounting information, it is expected that
A key role of financial statements is to summaries business rational decisions are made. But the use of accounting information
transactions and other events. Under this construct, the value depends on several factors, some of which are related to users of the
relevance of financial statement information is measured by its ability information and some others related to the quality and quantity of the
to capture or summarize information, regardless of source, that affects information. Financial information is essential in making sound
equity value (Francis and Schipper, 1999). investment decisions and it will reduce the informational asymmetry
Stock market is a place which facilitates corporations to raise equity problem between the firm’s managers and the investors (Hossain, et
capital, facilitates continuous economic growth and maintain liquidity al. 2004).
for the holder of the stocks who invest in these stocks for the purpose Accounting information is hypothesized to be value if it conveys
of capital gain. On the other hand the main objective of accounting information that modifies investor expectations of the firms’ future
data is to provide information about the company’s economy to cash flows, and ultimately causes the stock price to change (Scott,
different users inside and outside the company (Smith, 2006). 2003). Though the investors use non financial information in order to
In this research, the market price per share of the companies is taken make investment decisions, still conventional investors give more
as dependent variable and accounting information as independent weight to financial information. A main purpose of accounting is to
variable .Accounting information is explained by the earning per provide investors with relevant information for their investment
share and book value per share. decisions (see, e.g., Redovisningsrådet, 1995). According to the
Stock’s price is the most obvious and important criteria for survey done by the Boston College (2007), 62% of respondents
determining the firm’s value. So, stocks price maximization is the favored financial information and only 38% favor to the non financial
most important goal for most corporations to maintain their economic information for use in investment decisions.
growth and credibility in the mind of investors. To answer the The main objective of the research is to study the relevance of
question, what determines stock prices? The answer would be that it financial statement information for the valuation of stock. The
depends upon the company’s ability to generate cash flow now and purpose of this study is to investigate the importance of accounting
have a potential to generate in the future. Investors during the information for stock market responsiveness. It means whether
investment process compare the value of company which is accounting data provide value-relevant information to investors and
determined by the prices of the stock (Brigham and Ehrdart, 2001). other users which are reflected in share price or not
This study is organized as follows i.e., after introduction, section 2
presented the review of literature. Data source and methodological
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distribution, and reproduction in any medium, provided the original work is properly cited.
Journal of Economic Info Vol. 1, No.3 (2014) 6-9
framework explained in Section 3. Results discussed in Section 4. and company growth on the value relevance of accounting
Final section concludes the study. information have been studied. For this purpose Ohlson model and
the cumulative regression analysis was used in order to examine the
Literature review hypotheses and as the basis of data analysis T-test by Regression
coefficient analysis is deployed. The study concluded that that these
The ample research is available on the said topic; however, this factors influence on the value relevance of accounting information for
study has an incentive to estimate the value relevance of accounting investors in Tehran Stock Exchange.
information with respect to stock price, which are mostly ignored area Klimczak, (2010) extending comparative value relevance research by
in the financial research. Abiodun (2012) conducted a research on the examining patterns in the value relevance of accounting numbers as a
value relevance in corporate sectors’ of Nigeria and used logarithmic function of the month in which he observed current market values.
regression models on 40 companies for the period between 1999 to The study estimated the model on a sample of stock-exchange listed
2009. The results conclude that earnings is more value relevant than companies from Germany and France and find dramatically divergent
book values by extension that, the information contained in the patterns of fit. In France, The study concluded that accounting
income statements, dictates more the corporate values of firms in numbers have strong relevance for market valuation after publication
Nigeria than the information contained in the balance sheet. Relevant of annual reports in February or March. How ever in Germany,
information is such that it influences the economic decisions of users accounting numbers have stronger relevance during the fiscal year.
by helping them evaluate past, present and future events. Hadi (2004) tested the information content of accounting data in
Abayadeera (2010) tested for the value relevance of financial and Kuwaiti banks to the investors in stock exchange market. Six financial
non-financial information in high-tech industries in Australia with a ratios are used in research along with regression analysis to clear the
sample size of 91 companies running through various sectors of the problems of research. The research results indicated that accounting
Australian economy. The Ohlson’s (1995) Equity Valuation Model information is very useful to investors in Kuwaiti banks, and most
(modified for the intangible assets disclosure) was explicitly applied ratios are significant except the loss ratio.
to examine the value relevance of financial and non-financial Pervan, (2012) based on the sample of 97 corporations analyzed the
information with an overall results that provided evidence that book value relevance of accounting information on the capital markets of
value is the most significant factor and earnings are the least Southeast Europe. In the first part of the research they analyzed and
significant factor in deciding share prices in high-tech industries in compared value relevance on the following capital markets: Ljubljana
Australia. This finding of Abayadeera (2010) further supported Stock Exchange, Zagreb Stock Exchange, Sarajevo Stock Exchange,
previous studies that showed value relevance declined in earnings but Banja Luka Stock Exchange and Belgrade Stock Exchange. The
increase in book value. research results have shown that the accounting information are value
Glezakos, et al. (2012) studied the impact of earnings and book value relevant on all the observed markets but also that there are certain
in the formulation of stock prices on a sample of 38 companies listed differences in the value relevance among countries. In the second part
in the Athens Stock Market during the 1996-2008 period. The results of the research they tested the hypothesis that level of transparency is
concluded that the joint explanatory power of the above parameters in positively related with value relevance i.e. higher transparency of
the formation of stock prices increases over time. The study further annual report should result with higher value relevance of accounting
examined that the impact of earnings is diminishing, compared to the information.
book value, while investors strive towards analyzing the fundamental Akarim, etal. (2012) examined the relationship between accounting
parameters of businesses. Mohammadi, et al. (2012) investigates the earnings and stock market returns by using Panel Granger Causality
relationship between accounting information and the value of the test in Turkish Banking Sector. The study used data for banks which
companies accepted in Tehran exchange market. The profit quality are traded in Istanbul Stock Exchange from the period between 2000-
characteristic index is to be related and to be on-time. The number of 2010. The findings reveal that there is two way relationship between
194 companies was selected by systematic method as the statistics stock returns and accounting earnings supporting the relevance
sample in the period of 2007-2009. The results found that that there is theory. Investors get abnormal returns in Turkish banking sector by
no relationship between accounting information and companies’ value using accounting earnings.
(stock value), The study argue that this may be happened due to lack Mgbame (2013) conducted a study to ascertain if accounting
of efficiency of investment market and inability in using the information contributes to stock volatility in the Nigerian Capital
accounting information by investment market activists. Market. The study investigated the effect of accounting information
Halonen, et al. (2013) conducted a research in order to measure the on the volatility of stock market returns in Nigeria using GARCH
value relevance between accounting data and stock prices from OMX models. The results from models showed that accounting information
(Sweden) Large Cap between 2007-2010. The results revealed that explains and accounts for stock volatility in the Nigerian stock
value relevance from the balance sheet, measured by BVPS, has market. Specifically, information on book values, earnings per share
increased as compared to EPS. The results also show that accounting and dividend per share is found to be related to stock volatility. Miah
data explains a high proportion of the stock price. Perera (2010) (2012) assess the extent of association between two influential
addressed the relevance of Accounting Information on investor’s accounting variables (EPS and NAVPS) and market price of share.
stock market decisions in Commercial Banks registered under The study found that there is poor relationship between these two as
Colombo Stock Exchange (CSE) in Sri Lanka. The relevance of only about 6.5% of changes in share price can be explained by
accounting data was measured by correlation coefficient between changes in defined accounting variables. There is also a negative
Market Price per Share (MPS) and selected accounting information correlation between NAVPS and Share Price. Rather, it was found
such as Earning per Share (EPS), Return on Equity (ROE) and that a number of other qualitative factors also affect the market price
Earning Yield (EY). The data analysis was based on the AI in the such as information from speculators or other co investors.
published financial statements of Commercial banks registered under The above studies show the strong correlation between value
CSE for a period of 5 years from 2006 to 2009. The study concluded relevance of accounting information and stock prices. The subsequent
that there is a relationship between Accounting Information and section analyzes the relationship between value relevance and stock
Market Price per Share. Further, the study examined that investors prices in the banking section or Pakistan.
still consider Accounting Information which contain in the published
financial statements of Commercial Banks registered under CSE for Data source and methodological framework
the stock market decisions in Sri Lanka.
Nayeri (2012) examined the factors affecting the value relevance of Our sample consists of nineteen Private sector banks listed on
accounting information for investors in the Tehran Stock Exchange Karachi stock exchange. The secondary data is taken from the official
over the period of six years. In the study, the effect of four factors; site of the State bank of Pakistan and Karachi Stock Exchange.
being profitable or loss generating, company size, earnings stability

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79
Journal of Economic Info Vol. 1, No.3 (2014) 6-9
Annual data of during the period 2008-2012 have been collected from about 86.1% of the total variation in dependent variable is explained
the above mentioned sites i.e., by independent variables. There is no problem of autocorrelation in
Total number of Banks 48 the model as shown by the value of D.W stats. The overall
Total Private Banks (Conventional +Islamic) 22 performance of the model is satisfactory as shown by F-statistics.
Private Banks listed at Karachi stock exchange 19
Banks included in the sample 19 Table 4: Panel Least Square Regression
Missing data - Dependent Variable: MPPS
Final sample size 19 Method: Pooled Least Squares
Table 1 shows the list of private sectors bank in Pakistan. Variable Coefficient Std. Error t-Statistic Prob.
C 6.028143 2.081372 2.896236 0.0047
EPS 6.372850 0.267102 23.85923 0.0000
Table 1: List of Private Sector Banks
BVPS -4.121522 0.972858 -41.518410 0.0000
S.No Name of the Bank R-squared 0.860998 Mean dependent var 30.38011
1 Bank Alfalah ltd Adjusted R- 0.857976 S.D. dependent var 46.57917
2 Bank Al Habib ltd squared
3 Allied Bank limited S.E. of 17.55386 Akaike info criterion 8.599495
4 Askari Bank limited regression
5 Bank Islami limited Sum squared 28348.70 Schwarz criterion 8.680143
6 Faysal Bank Limited resid
7 Habib Bank limited Log likelihood -405.4760 F-statistic 284.9299
8 Habib Metropolitan bank limited Durbin-Watson 1.732970 Prob(F-statistic) 0.000000
9 JS Bank limited stat
10 KASB Bank limited
11 MCB Bank limited
12 Meezan Bank limited From the above statistical data it is obviously apparent that there is a
13 NIB Bank Limited relationship between the changes in share price and changes in
14 Samba Bank limited accounting variables (i.e. EPS and BVPS). Because sample Banks
15 Silk Bank Limited show that there is only 92.8% relationship between changes in EPS
16 Soneri Bank limited and changes in share price of those banks and weak negative
17 Standard Chartered Bank limited relationship between changes in BVPS and changes in share price.
18 Summit Bank limited Now if we see the hypothesis testing, it can be concluded that
19 United Bank limited
predefined null hypothesis is rejected as there is a strong relationship
between the earning per share and book value per share. On the other
This study uses a price model to analyze the results, since the share
hand there is a negative relationship between changes in share price
price is the dependent variable where as EPS and BKPS are two
and Book value per share. So, second null hypothesis is accepted.
independent variables. This study is based on the secondary sources
Hence it is apparently assumed that accounting information is
of information. Mainly this study examine the empirical relationship
properly reflected on share price or investors use the accounting
between accounting information or variables like Earning per Share
information to make their investment decision in Pakistan and share
(EPS), BVPS, and equity share price in the market for the period of
price is significantly influenced by the changes in accounting
2008-2012 in KSE database.
variables. Rather other qualitative factors also play an important role
The research hypotheses are as follows i.e.,
in this aspect. It may be for example, appointment or dismissal of key
H1: The earning per share significantly affects the stock price.
personnel in the regulatory authority like Security Exchange
H2: The Book value per share significantly affects the stock price.
Commission (SEC) , changes in major policies of the organization
affecting investors economic well being, declaration of dividend,
Results changes of chief staff in commerce ministry, or Finance Ministry,
Law and order situation and political conditions etc.
Table 2 shows the descriptive statistics of the variable.
Conclusion
Table 2: Descriptive Statistics
MPPS EPS BVPS
Mean 30.38011 3.836316 25.28128 The present study has been undertaken to assess the extent of
Maximum 228.5400 24.47000 98.523 association between two accounting variables (i.e., EPS and BVPS)
Minimum 1.100000 -4.540000 0.218707 and market price of share. It is found there is strong relationship
Std. Dev. 46.57917 6.778852 26.365 between these two. There is also a negative correlation between
Skewness 2.612507 1.596638 1.642 BVPS and Share Price. From this study, it is suggested that investors
Kurtosis 9.916675 4.784390 4.512 should have basic knowledge of business and economics. They should
Observations 95 95 95 be well informed when making their investment decision. They
should not depend on the information from speculators or other co
The mean value of MPPS is 30.38. While the mean value of EPS and investors who have the similar interest on the identical phenomenon.
BVPS is 3.84 and 25.28. Table 3 shows the correlation matrix. Rather they should go through the audited annual reports which
provide the mirror of the company’s performance, financial position
Table 3: Correlation Matrix and changes in control of the owners.
MPPS EPS BVPS
MPPS 1
EPS 0.928 1 References
BVPS -0.030 -0.01 1
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distribution, and reproduction in any medium, provided the original work is properly cited.
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