An analysis of the value relevance of accounting information within the UK after the adoption of International Financial Reporting Standards
Hariem Abdullah (119020216)
Supervisor: Prof. Yuval Millo
Dissertation submitted to the University of Leicester in partial fulfilment of the requirements for the degree of MSc Accounting and Finance
August 2013
Word Count: 15,637 Words
Acknowledgements I would never have been able to finish my Masters Degree course without the guidance of my teachers at the University of Leicester, help from friends, and support from my parents and my wife. I would like to thank God first and the Kurdistan Regional Government secondly, for giving me a golden chance to study an MSc degree abroad in the UK. The Human Capacity Development Program (HCDP) is one of the most valuable strategic programs run by the KRG. It is really worth mentioning that this program has benefitted me greatly, and will also hopefully benefit our home country of Kurdistan too.
Great respect and special thanks go to my beloved parents, who have always supported me and prayed for me. Without their love and support, it would have been impossible to bear the difficulties during my study overseas. My sincere appreciation and gratitude go to them for their generous prayers, care, and their endless moral support throughout my life.
I would also like to express my sincere thanks and deep appreciation to my supervisor, Professor Yuval Millo, for his supervision, guidance, and motivation, and for the ceaseless encouragement he has given me. His profound knowledge and experience have provided me with valuable opportunities to broaden my knowledge and make significant progress with my project. Last but not least, to my dear wife, Razha, I extend my heartfelt thanks and sincere appreciation for her love, support, and sacrifice throughout my study. This MSc was a challenge that I would never have completed without her patience and constant support. Her love, support and constant patience have taught me so much about sacrifice, discipline and compromise.
i
Abstract This thesis investigates the value relevance of accounting information prepared under International Financial Reporting Standards (IFRS) and as listed on the Financial Times Stock Exchange, (FTSE) 250, London. Drawing strongly upon the price model developed by Ohlson (1995), this paper has three principal objectives to reach. The first is to investigate the value relevance of book value and earnings reported by companies listed on the FTSE 250 over 2005-2012. The second is to examine the possible changes in the value relevance of accounting information over the eight-year period of post-IFRS adoption. Finally, the study considers how far other possible factors, such as industry category and firm size, significantly influence the association between accounting information and stock prices.
The research findings indicate that book value and earnings were positively and significantly related to stock prices between 2005 and 2012. However, the strength of this relationship has declined significantly over the period, suggesting that the value relevance of accounting data prepared under IFRS has decreased over time. The research also finds that there were both industry-specific and firm-size differences in the valuation of book value and earnings. The results of this paper make several essential contributions. They provide useful insights into the literature around the value relevance of accounting data in the UK since the adoption of IFRS. They also add a new dimension to the literature; a specific consideration of the changes in value relevance over the eight-year of the post-IFRS period, which represents the longest post-IFRS inquiry, particularly in terms of UK data.
ii
Content List Acknowledgements ............................................................................................................................. i Abstract .............................................................................................................................................. ii CHAPTER ONE: Introduction....................................................................................................... 1 1.1.
Research Motivation .............................................................................................................. 3
1.2.
Research Questions ................................................................................................................ 3
1.3.
Research Design ..................................................................................................................... 4
1.4.
Summary of Major Findings .................................................................................................. 4
1.5.
Contributions of the Paper...................................................................................................... 5
1.6.
Organisation of the Study ....................................................................................................... 5
CHAPTER TWO: Literature Review ............................................................................................ 6 2.1.
Value relevance, definition and proxies ................................................................................. 6
2.2.
Changes in value relevance over time .................................................................................... 9
2.3.
IFRS adoption and Value Relevance ................................................................................... 12
2.3.1. International comparison of value relevance research ..................................................... 13 2.3.2. Within country value relevance research ......................................................................... 17 2.4.
Conclusion............................................................................................................................ 22
CHAPTER THREE: Methodology............................................................................................... 23 3.1.
Theoretical Framework and Hypotheses Development ....................................................... 23
3.2.
Data and Research Methods ................................................................................................. 25
3.2.1. Time Period, Sample and Data Description ..................................................................... 25 3.2.2. Empirical Valuation Model Measuring Value Relevance ................................................ 26 3.2.3. Changes in Value Relevance of Book Value and Earnings ............................................. 29 3.2.4. Factors Influencing Value Relevance of accounting information .................................... 30 3.2.5. Extended Models .............................................................................................................. 32 3.3.
Conclusion............................................................................................................................ 33
CHAPTER FOUR: Results of Value Relevance of Accounting Information ........................... 34 4.1.
Descriptive Statistics ............................................................................................................ 34
4.1.1. Descriptive Statistics for the Model’s Variables .............................................................. 34 4.1.2. Bivariate Correlation Results ........................................................................................... 37
iii
4.1.3. Checking Assumptions of the Multiple Regression Analysis .......................................... 38 4.2.
Empirical Results ................................................................................................................. 39
4.2.1. Value Relevance Of Book Value and Earnings (H1 and H2) .......................................... 39 4.2.2. Changes in the Value Relevance of BVPS and EPS over 2005-2012 (H3 & H4) ........... 44 4.2.3. Factors Influencing the Value Relevance of Book Value and Earnings .......................... 49 4.2.4. Extended Research Model ................................................................................................ 52 4.2.5. Summary of the Results ................................................................................................... 53 CHAPTER FIVE: Conclusion ...................................................................................................... 54 5.1.
Summary and Discussion of results ..................................................................................... 54
5.2.
Major Contributions and Implication ................................................................................... 58
5.3.
Limitations and Recommendations ...................................................................................... 59
5.3.1. Limitations ....................................................................................................................... 59 5.3.2. Recommendations for Future Research: .......................................................................... 60 References: ....................................................................................................................................... 61 Appendices: ...................................................................................................................................... 67
iv
List of Tables
Tables
Page
4.1 Descriptive Statistics for 2005-2012 Observations 4.2 Firms listed on FTSE 250 in Industry Category 2005-2012 4.3
Bivariate Correlations among Dependent and Independent Variables over the 2005-2012 period
4.4
yearly Cross-Sectional and Pooled Regression of Price on Book Value and Earnings 2005-2012
4.5
Linear Regression of the R2Both, R2BVPS and R2EPS on a Time-trend Variable 2005-2012
4.6
Pooled Sample Regression of Price on BVPS, EPS and Dummies of Industry Categories
4.7
Pooled Sample Regression of Price on BVPS, EPS and Dummy of Firm Size
4.8 Regression Results of the Extended Model
List of Fegures Figures
Page
4.1
Trend Change of Value Relevance over 2005-2012
4.2
Trend Change of the Value Relevance of BVPS and EPS regarding the Industrial Firms (2005-2012)
v
List of Observations
ASX
Australian Securities Exchange
FTSE
Financial Times Stock Exchange
GB
Great Britain
IASB
International Accounting Standard Board
IBEX
The Benchmark Stock Market Index
IFRS
International Financial Reporting Standards
IGBM
Madrid Stock Exchange General Index
LSE
London Stock Exchange
R&D
Research and Development
UK
United Kingdom
US
United States
vi
CHAPTER ONE Introduction This study investigates the value relevance of accounting information produced under International Financial Reporting Standards (henceforth IFRS) in the UK over the period 2005-2012. The value relevance of accounting information is a popular area of study for accounting researchers and is also considered significant by investors, regulators and other users of financial statements (Alali and Foote, 2012). Over the last 20 years, several papers have been published which focus upon the value relevance of information contained within financial statements.
The principal objective of value relevance research is presumably to examine whether the financial reports of companies provide investors and other users with both valuable and high quality accounting information. Subsequently, this enables them to make informed decisions. The International Accounting Standards Board (IASB) states that the purpose of financial reports is to “provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions” (IASB, 2010, Paragraph 9). This means that any event which is likely to affect the current financial position or future performance of a company, should be reflected in its financial statements, hence valuable patterns of data and impact can be captured.
The adoption of IRFS across Europe in 2005 can be considered a significant change in the quality of accounting information in general, and to the value relevance of accounting information in particular (Collao et al., 2007; Chalmers et al., 2011; Ahmed, 2012). Several studies have investigated the specific impact of IFRS adoption on the value 1
relevance of financial reports. As a result, it is broadly claimed that the value relevance of accounting data increased as a result of the IFRS introduction (Jermakowicz et al., 2007; Kousenidis et al., 2010; Aharony et al., 2010; Chua et al., 2012; Elias, 2012). This impact is generally assumed to be higher for the countries who operate a code law regime, and lower for common law regimes (Paananen and Parmar, 2009; Gaston et al., 2010; Tsalavoutas and Evans, 2010; Punda, 2011). Therefore, only a small influence from IFRS adoption is likely to be observed based on the accounting information produced by firms in the United Kingdom (UK), which is a common law country (Iatridis, 2010). However, this prediction runs contrary to the argument around the level of enforcement. High enforcement regimes tend to indicate high impact of IFRS adoption on value relevance (Kothari, 2000). Consequently, it may be that IFRS implementation has a strong influence on the value relevance of accounting information for UK companies, given that the UK operates a high level enforcement (Gaston et al., 2010).
Published studies have also investigated changes in the value relevance of financial reports over a horizontal period. Some papers have claimed that the relevance of accounting data to market value has increased over time due to factors such as alternation in the accounting and financial regulatory system (Collins et al., 1997; Gjerde et al., 2005). However, other papers report declines in the value relevance over time because investors have relied heavily on non-financial information (Brown et al., 1999; Alfaraih, 2009).
Although the impact of IFRS adoption on the value relevance of accounting data has been widely studied, very little research evidence investigates the changes, particularly over a long, sustained period. Thus, this paper seeks to address this gap by considering the accounting information presented in financial statements within the UK market after IFRS adoption in 2005.
2
1.1.
Research Motivation
This research was motivated by two main factors. Recent papers, such as Iatridis (2010); Chalmers et al. (2011); Clarkson et al (2011) and others, were the first motivators of this current study. They all investigated the capacity of financial information to accurately value firms, before and after IFRS adoption, in different countries. Their work largely encouraged future studies to observe more widely and over longer periods. The second motivation was the lack of existing research on the changes in the value relevance of accounting information since IFRS adoption, although many studies have explored this issue prior to the IFRS introduction (Collins et al., 1997; Francis and Schipper, 1999; Gjerde et al., 2005). Thus, this study investigates the potential changes in the ability of accounting information to represent firm value regarding the UK companies.
1.2.
Research Questions
This research has three primary objectives. The first is to investigate the value relevance of accounting information produced by companies listed on the London Stock Exchange (LSE), Financial Times Stock Exchange (FTSE) 250. The second is to examine the possible changes in the value relevance of financial reporting information over the 20052012 period. Finally, the study examines whether other possible factors, such as firm size and industry category, significantly influence the association between accounting information and stock prices. Consistent
with the empirical research from literature
(Collins et al., 1997; Pirie and Smith, 2005; Gaston et al., 2010; Khanagha, 2011), the considered accounting data are: book value of equity and earnings per share. Based on the research objectives, the following research questions are addressed:
3
1- Was accounting information, book value and earnings, value relevant to participants in the UK following the adoption of IFRS, between 2005 and 2012? 2- Did the value relevance of book value and earnings change over that period (2005-12)? 3- Did factors such as firm size and industry category have any impact on the value relevance of book value and earnings over the period?
In accordance with the above raised questions, six research hypotheses are developed (in Chapter 3) and tested in order to address the objectives of the paper comprehensively.
1.3.
Research Design
The research investigates the value relevance of financial statements reported by firms listed on the FTSE 250 between 2005 and 2012. In other words, the paper examines value relevance over an 8-year period since the adoption of IFRS in the UK. The data required to conduct this research includes book value of equity, earnings per share, stock price per share, total assets and industry categories. The main source of this data is Bloomberg. The research follows the price model of Ohlson (1995) in investigating associations between accounting information reported by a firm and its market value (stock price). This model was specifically designed to investigate the relationship between stock prices and book value and earnings.
1.4.
Summary of Major Findings
The results indicate that both book value and earnings, together and individually, were significant factors in firms’ valuations on the FTSE 250 during the period 2005-2012. In other words, book value and earnings were value relevant to FTSE 250 participants over
4
the 8 years. In addition, a significant decline was observed in the value relevance of book value and earnings over that period. The consequences also show that both firm size and industry category factors impacted significantly on the value relevance of book value and earnings.
1.5.
Contributions of the Paper
This paper provides useful insights into the literature around the value relevance of accounting data in the UK after IFRS adoption. It also brings a new dimension to the literature; an investigation of the eight-year post-IFRS period in the UK, into the changes in value relevance. Additionally, it warns the LSE of the need to consider – and take serious steps to control levels of compliance by the listed companies. The level of compliance has been positively related to the value relevance of accounting information (Alfaraih, 2009), suggesting that the decline in value relevance which has been observed, may well be linked to a decline in levels of compliance.
1.6.
Organisation of the Study
The remainder of this paper is organised as follows: Chapter 2 provides a review of existing and relevant literature regarding the value relevance of financial statements. Chapter 3 identifies a theoretical framework to assist the analysis, including the research model and related hypotheses. It also sets out the research design, detailing the variables, study period, data collection and the statistical analysis performed. Chapter 4 presents the results for the value relevance of accounting information. The thesis concludes in Chapter 5 with a summary and discussion of the results, and an outline of the study’s major contributions, limitations, and implications.
5
CHAPTER TWO Literature Review
Consistent with the research objectives, this chapter focuses on three main aspects of the literature. First, the concept of ‘value relevance’ as applied to accounting information, will be introduced and explored. Well-known publications are presented and discussed. Secondly, the chapter examines literature that investigates potential change in the value relevance of accounting information over a period of time. Finally, there will be a discussion around the impact and consequences for value relevance arising from the adoption of IFRS globally.
2.1.
Value relevance, definition and proxies
Value relevance has been defined by Suadiye (2012) as the ability of accounting information that is presented by financial statements to provide sufficient information to users in order to enable them to capture and summarize firm value precisely. The relevance of financial statements can also be defined in terms of how useful they are to equity investors (Al-Hogail, 2004; Cormier and Magnan, 2010). Value relevance research considers the association between a set of independent accounting variables and market value as a dependent variable (Beaver, 2002; Kousenidis et al., 2010; Devalle et al., 2010). The smaller the difference between accounting information and market valuation, the more relevant this information is thought to be and vice versa (Gjerde et al., 2005; Hillier et al., 2010). In other words, accounting information would be relevant to market value if it were to be significantly associated with any dependent variable.
6
The main focus of existing value relevance research appears to be to examine how far published financial statements provide valuable corporate information for investors (Negakis, 2005; Paananen and Parmar, 2008). It is argued by some, that value relevance research also provides useful insights into accounting matters not only for investors, but for standard setters and other users (Barth et al., 2001). Additionally, Barth et al. (2001) maintain that the primary objective of value relevance research is to supply information concerning the relevance and reliability of accounting numbers as reflected in equity values. Francis et al. (2004) count value relevance as one of the main attributes of accounting information alongside accrual quality, conservatism, persistence, predictability, smoothness and timeliness.
The studies of Ball and Brown (1968), and Beaver (1968) represent the first attempts to scrutinise the complex relationship between accounting information and stock prices (Alfaraih, 2009). Despite the long history of this notion to explore values, the actual term ‘value relevance’, seemed to have been used for the first time by Amir et al (1993). Since that time, this concept within financial accounting has been considered from many perspectives. Moreover, some well-known models are widely cited within the literature, which seek to determine the value relevance of accounting information. The most popular models are Easton and Harris (1991); Ohlson (1995); and Collins et al. (1997). These identified models have tended to measure the value relevance of accounting information somewhat differently, as they do not factor in the same variables.
Easton and Harris’s work (1991), commonly known as the return-earnings model, takes earnings level and book value of equity, as relevant explanatory variables for returns. In contrast, the Ohlson model (1995) suggests that the value relevance of accounting numbers can be measured via the relationship between its accounting data, such as book value per 7
share and abnormal earnings, and share prices. This model is currently referred to as the price-earnings model (Alali and Foote, 2012). In addition, Collins et al. (1997) suggest that each of book value and earnings can individually act as a significant independent variable in explaining stock prices. In other words, book value and earnings are likely to be value relevant in determining stock prices or return. Suadiye (2012) confirms that the aforementioned models each measure value relevance according to some statistical relation between financial statements information and stock price or return values. However, there are many other studies that claim other factors impact on the equation, such as countryspecific accounting system (Graham et al., 2000; Ballas and Hevas, 2005), firm size (Collins et al, 1997; Chalmers et al., 2011) and industry-specific factors (Ballas and Hevas, 2005; Alfaraih, 2009).
A number of studies have tested these valuation models. For instance, Vazquez et al. (2007) in Mexico; and Dahmash and Qabajeh (2012) in Jordan have both tested the Ohlson model (1995). In the Jordanian research, Dahmash and Qabajeh (2012, p. 559) conclude that the model appeared to be “highly value relevant in capturing share prices for Jordanian industrial, and commercial public companies”. Pirie and Smith (2005) emphasise that both earnings and book value of equity variables can usually explain a substantial part of the variation in share prices and return. Therefore, research findings here seem to strongly indicate that book value and earnings may well be able to measure the value relevance of financial statements.
8
2.2.
Changes in value relevance over time
A significant element of the literature regarding value relevance investigates the possible increase or decrease in the value relevance of financial statement information over given time periods. Researchers frequently use the statistical association coefficient (R2) as a tool to analyse the relationship between accounting data and share prices or return. Consequently, the adjusted R2 is regressed to whatever time period is considered by a study in order to account for changes in underlying economic variables over that period (Collins et al., 1997; Brown et al., 1999; Francis and Schipper, 1999; Gjerde et al., 2005; Alfaraih, 2009). As a result of such analytical tools and variables, different results have been claimed by different researchers.
Collins et al. (1997) examine changes in the value relevance of book value, earnings and combined earnings, and book value for U.S. firms over a forty-one year period (1953-93). Their study discloses three main findings. First, value relevance of the combination of book value and earnings seems to increase slightly over time rather than decrease. Second, the value relevance of book value appears to increase over the study period but, at the same time, the value relevance of earnings declines. Third, there is a shift in value relevance from earnings to book value. This possibly resulted from an increase in the incidence and significance of one-time items, an increased frequency of negative earnings, and changes in intangible intensity level and average firm size over the study period. As a result, Collins et al. (1997) claim an increase in the value relevance of financial reporting information over the research period.
9
Brown et al. (1999) also undertook a long-term study in the US. They explore whether the value relevance of both book value and earnings changed over the 1958-1996 period in the US. The results of their research conclude that the value relevance of accounting data declined over the considered period. Lev and Zarowin (1999), working in the US, also highlight that the usefulness of reported earnings, cash flows, and book value has deteriorated over the 1976 to 1996 period, In
a more recent study, Alfaraih (2009)
similarly identifies a decrease in the relevance of financial information in Kuwait over the 1995-2006 period.
The main argument for these declines observed is that investors had increasingly relied upon non-financial data, instead of solely financial information. This is consistent with the well-known argument in finance, which suggests that investors are not all rational in the market (Hillier et al., 2010; Damodaran, 2001). Rationality can broadly be summarised as when investors depend only on financial information (Fama, 1998). In other words, the findings from Brown et al. (1999), Lev and Zarowin (1999) and Alfaraih (2009) all suggest that the reliance of investors on financial information when making economic decisions has decreased over time (i.e. irrationality has increased). Therefore, it can further be deduced that the association between accounting information and market valuation has similarly decreased.
In parallel with Brown et al. (1999); Lev and Zarowin (1999) and Alfaraih (2009), Francis and Schipper (1999) also report a decline in the value relevance of book value; their study investigates the potential change in the value relevance of financial statements of firms listed on the NASDAQ over the period 1952-1994. The main concern of their research is whether ‘’investments based on financial statement information earn progressively less over time’’ (p. 320). The consequences of their tests illustrate a lessening in the relevance
10
of earnings information, and an increase in the relevance of book value information, over the sample period. These results are consistent with the results of Collins et al. (1997); Chang (1999); Ely and Waymire (1999). When questioning whether the value relevance changes might vary between low and high technology firms, Francis and Schipper (1999) observed no differences.
Chang (1999) examines modifications in the value relevance of book value and earnings for U.S. companies from 1953 to 1996. He also studies the factors associated with those changes. In considering the residual income valuation method, Chang (1999) investigates three measures of value relevance: portfolio return measures, variation measures and valuation lag measures. Chang’s findings (1999), based on his examination of portfolio return measures, indicate that the value relevance of both book value and earnings decrease over time. Nevertheless, he also found that the returns from earnings-based portfolios had remained stable over the period. The results of variation measures confirm that the value relevance of book value and earnings had likewise decreased over the period studied. His research also illustrates a nonlinear change in the valuation lag measure over time. In addition, Chang’s paper (1999) discusses factors associated with changes in the value relevance of both book value and earnings. The outcomes demonstrate that intangible asset intensity, growth difference and nonrecurring items are all inversely associated with the value relevance of book value and earnings.
However, in a more recent study, Gjerde et al. (2005) argue that the value relevance of financial reporting information for investors has increased significantly; their work covers the period between 1964 and 2003 on the Oslo Stock Exchange. They argue that the main factor leading to these increases, are the efforts of Norwegian accounting regulators and standard setters to achieve more value relevant financial information over the time period.
11
This finding suggests that a positive change in Norway’s accounting regulations could potentially have increased the value relevance of accounting information. The impact of IFRS introduction on value relevance, which will be discussed in the next section, appears to reach a similar conclusion.
Similarly to Gjerde et al. (2005), Brimble and Hodgson (2007) also identify an improvement in the value relevance of accounting earnings. Their research investigates changes in the value relevance of accounting earnings for valuation in Australia between 1973 and 2001, using nonlinear regressions and adjusting for likely stock market inefficiencies. Another European study, Bartov et al. (2005) similarly found that the value relevance of accounting data had enhanced regarding German firms over the 1990-2000 period.
2.3.
IFRS adoption and Value Relevance
The IFRS is a set of financial statement standards issued by the IASB. The primary objective of the accounting standards is to develop "a high-quality set of standards that increases transparency and harmonises accounting practices across jurisdictions" (Armstrong et al. 2009 cited in Horton and Serafeim, 2010; p. 726). It has been argued that having clear, consistent standards could then assist users of that information to make economic decisions more efficiently inside the world’s capital market (Epstein and Mirza, 2002). In other words, relevance, reliability and comparability of financial information are likely to be the main objectives of the IASB (Epstein and Jermakowicz, 2008). The IASB is the independent, accounting standard-setting body of the IFRS foundation, and is responsible for developing and promoting the use and application of these standards.
12
The point at which the IFRS was adopted, 1st January 2005, is widely considered one that brought a significant change to accounting systems across many countries. Accordingly, an extensive literature can be seen to have developed, which has sought to explore the varying impact of the IFRS implementation. In particular, its effects on the value relevance of accounting information have been studied broadly. Some articles have claimed that the adoption of the IFRS has had insignificant (or even negative) impact on the value relevance of accounting data (Hung and Subramanyam, 2007; Aubert and Grudnitski, 2011; Chalmers et al., 2011). Whereas others, arguably the majority, have concluded that the financial information produced under the IFRS is more value relevant (Jermakowicz et al., 2007; Kousenidis et al., 2010; Aharony et al., 2010; Chua et al., 2012; Elias, 2012).
The empirical literature on the value relevance and IFRS adoption can be partitioned into two main groups: studies that offer an international comparison, and those which focus on value relevance within a country.
2.3.1. International comparison of value relevance research
It is theoretically expected that the impact of IFRS on the relevance of financial reporting would be highly significant for those countries where local standards are considerably different from international standards (i.e. European continental countries), and vice versa concerning places more closely aligned to international accounting standards (i.e. Anglo-Saxon countries) (Paananen and Parmar, 2008; Gaston et al., 2010; Tsalavoutas and Evans, 2010; Punda, 2011). The primary principle behind this is that common law countries have better accounting systems and better protection of investors than code law countries (La Porta et al., 1998 cited in Bhattacharjee, 2009). Using this notion, the empirical impact should be lower in the UK, as it can be classified as an Anglo-Saxon country (Gaston et al., 2010).
13
Morais and Curto (2009) conducted a study assessing whether the value relevance of European-listed companies increased after the mandatory application of IFRS. Their paper investigates the association between book value and net income with the market price of shares in 14 European countries, including the UK, from 2000 to 2005. The results of the investigation demonstrate that the value relevance of financial information is higher for the post-IFRS period. Morais and Curto also claim that countries where accounting and tax are clearly separated show more relevant accounting information.
Devalle et al. (2010) use a sample of 3,721 companies listed on five European stock exchanges, including the London Stock Exchange. Their evidence presents a mixed picture of increases in the value relevance both of book value of equity and earnings in the UK. Despite this, the association between book value and share price decreased following the introduction of IFRS in Germany, France, Italy and Spain. However, Aubert and Grudnitski (2011) investigate the same issue, covering a relatively wider sample of countries (13 European countries), including the UK. It is interesting to note that they identify remarkably different results to what was expected by Devalle et al. (2010), particularly in respect of the UK. The results of Aubert and Grudnitski’s paper suggest that there is no statistical evidence for any of the samples to confirm that financial reporting presented under IFRS regulation, was any more value relevant than the financial reporting produced using previous domestic accounting practices. In other words, these findings suggest that the value relevance of accounting data is unlikely to change because of the adoption of IFRS, even in the UK. Nevertheless, it is important to weigh this evidence alongside opposite results that have been put forward by several studies involving the UK in comparisons. (Manganaris et al., 2011; Iatridis, 2010; Gaston et al., 2010).
14
Kontopoulos et al. (2010) use a regression model to examine the value relevance of accounting information for a significant sample of 200 companies (50 each in France, Germany, the Netherlands and the UK) from 2003 to 2006. They follow the Ohlson model (1995) by testing the association between accounting variables and share prices. Additionally, their research concentrates upon the country-specific accounting system (investor vs. creditor-oriented systems). Their results indicate that there is an overall increase in the value relevance of accounting information, however, that the size of the changes varies from country to country due to the differences within their accounting systems. Kontopoulos et al. (2010) claim that financial statements of the creditor-oriented countries (France and Germany) seem to be more relevant than investor-oriented countries (the Netherlands and the UK), because of the transition to IFRS. This is consistent with the theoretical expectation of Paananen and Parmar (2008); Gaston et al. (2010). From Kontopoulos et al. (2010) results, it can equally be observed that the impact of IFRS adoption on value relevance might realistically be empirically different from one country to another, due to operating different accounting systems.
Aharony et al.(2010) investigate the impact of IFRS adoption on the value relevance of accounting information in 14 European countries, including the UK, over 2003-2006 by comparing the return and price-based value relevance models. In addition to the book value of equity and earnings variables, this study included three other accounting information items to their investigation of supplementary variables; goodwill, research and development expenses (R&D), and asset revaluation,. Their starting hypothesis was that measurements under IFRS were likely to differ substantially from measurements under domestic accounting practices. Data from the 2010 study indicates that the implementation of IFRS has enhanced the value relevance of the three accounting numbers in the EU for
15
investors in equity securities. In other words, Aharony et al. (2010) suggest that a tangible positive impact from the IFRS adoption on value relevance can be clearly seen within Europe, regardless of the influence of other factors such as
any country-specific
accounting system (Kontopoulos et al., 2010; Gaston et al., 2010; and Chalmers et al., 2011), and enforcement (Daske et al., 2008).
A further comparative study carried out by Clarkson et al. (2011), examines the impact of IFRS adoption on the relevance of book value and earnings in 15 countries and categorise the countries into two main groups on the base of Code-Law and Common-Law countries. Using a non-linear pricing model over 2004-2005, their results suggest that there is no observable change in value relevance for firms in either Code Law or Common Law countries, whereas the results are more contrary (i.e. both increases and decreases are observed) in relation to linear pricing models.
Gaston et al. (2010) study the effect of IFRS adoption on the relevance of financial reporting of firms listed on the Madrid Stock Exchange General Index (IGBM) and the Financial Times Stock Exchange Index 100 (FTSE 100). In other words, Gaston et al. (2010)’s paper compares two contradictory systems of accounting by studying the effect of IFRS adoption on two countries (the UK and Spain) over 2004-2005. The results of their paper claim that despite the fact that the effect of IFRS on financial reporting relevance was significant only in Spain, the IFRS regulations have nevertheless had a negative effect on the value relevance of financial reporting in both the UK and Spain. Thus, contrary to the findings of Aharony et al. (2010), Gaston et al. (2010) highlight the absence of any enhancement in the value relevance of accounting information after the adoption of IFRS regarding both countries. Likewise, Hung and Subramanyam (2007) assert that the book
16
value of equity has not become more relevant under IFRS in German. In addition, Callao et al. (2007) also found that there was no improvement in the relevance of financial reporting to local stock market operators in Spain (IBEX-35 companies) because the gap between book and market values widened when IFRS was applied.
In contrast, Manganaris et al. (2011) have recently investigated the value relevance of accounting information based on the return model of Easton and Harris. Data from this study suggests that any impact of IFRS implementation on the value relevance in the codelaw European countries, such as Germany, France and Greece, are almost negative. This is also supported by Psaroulis (2011) regarding Greece. However, Kousenidis et al. (2010) claim an increase in the value relevance of earnings for Greek companies after IFRS adoption. Jermakowicz et al. (2007) also suggest a positive change in the value relevance of earnings in Germany. In addition, Manganaris et al. (2011) argue that this effect is likely to be positive in terms of the common-law European countries, such as the UK. What these varying results help to illustrate, is that, apart from the accounting system itself, other factors can continue to have significant influence on the impact of IFRS adoption on the value relevance of accounting information.
2.3.2. Within country value relevance research
Paananen and Parmar (2008) investigate changes in financial reporting capacity in order to predict equity values of all the UK listed firms from 2003 to 2006. Their study considers the IFRS adoption in 2005 as a controlled variable. Using the Ohlson (1995) framework, they claimed that accounting information capacity would not improve after the IFRS adoption. In contrast, using binary logistic and the OLS regression analysis to examine 241
17
UK listed firms during 2004 and 2005, Iatridis (2010) claims that the implementation of IFRS in the UK resulted in greater value relevant accounting measures. Moreover, Paananen and Parmar (2008) found that, after the adoption of IFRS, investors were likely to rely more on the book value of shareholders’ equity and less on earnings information. A similar finding was highlighted by Hung and Subramanyam (2007) which was consistent with earlier investigations regarding change in the value relevance of accounting information over time, by Collins et al. (1997).
Kouser and Azeem (2011) examine the relationship between share price and both book value and earnings for non-financial public limited companies listed on Karachi Stock Exchange (in Pakistan) over the period of 2002 to 2009. Using OLS regression for data analysis, the results of this study suggested that both relationships were likely to reveal stronger figures after the adoption of IFRS in 2005. However, the evidence seems to be slightly different with regard to Turkey when Kargin (2013) employs the Ohlson (1995) valuation model. Her study investigates the value relevance of accounting information in Turkey from 1998 to 2011. Her recently published results indicate that the value relevance of book value has enhanced in the post-IFRS period, whereas enhancements are not noted in terms of the value relevance of earnings.
Chalmers et al. (2011) investigate changes in the value relevance of accounting information resulting from the adoption of IFRS, for firms listed on the Australian Securities Exchange (ASX). Using a longitudinal study that covered pre-IFRS and postIFRS periods during 1990–2008, their study confirms that IFRS adoption has had a significant impact on the associations between accounting information and share prices. In particular, Chalmers et al. (2011) find that earnings become more value relevant while the
18
book value of equity remains almost the same. In addition, although their study considers company size factor, categorising the sample firms into large and small, they claim the same results regardless the size of the firms. As a consequence, size of company does not seem to be a significant factor influencing the possible impact of IFRS adoption on the value relevance of financial reporting. Nevertheless, Collins et al. (1997), Gjerde et al. (2005) and Alfaraih (2009) all assert the opposite; that company size is a factor that impacts on the value relevance of accounting information.
Similar to Chalmers et al. (2011), Chua et al. (2012) examine the same issue in the same market. However, the covered duration is remarkably different. Chua et al’s (2012) study covers a period of 8 years, from 2001 to 2008, whereas the duration of Chalmers et al. (2011)’s study is longer by 10 years (from 1990 to 2008). The conclusions of Chua et al. (2012)’s paper suggest that the degree of association between accounting data and share prices strengthened as a result the mandatory adoption of IFRS in Australia. A similar outcome result is also suggested by Elias (2012) concerning Australia. Despite this closer association, Chambers et al. (2011) claim that the relevance of book value has neither increased nor decreased during the four post-IFRS years (2005-2008). This difference might have occurred because of differences in the observation sample size. Chalmers et al’s (2011) investigation includes a relatively larger observation additionally it covered a considerably longer period than it had been considered by the studies of both Chua et al. (2012) and Elias (2012).
A further research carried out by Tsalavoutas et al. (2012) which examines the combined value relevance of book value and net income from 2001 to 2008, before and after the mandatory transition to IFRS in Greece. Their findings propose that value relevance would
19
not be affected by the IFRS implementation in Greece. Similarly, Tsalavoutas et al. (2009) had found no significant change in the value relevance of book value and earnings regarding small and developed markets in Greece between 2004 and 2005. However, Psaroulis (2011) whose work was published in between these other studies, observed lower value relevance of accounting numbers in Greece, resulting from the adoption of IFRS.
A further factor considered in the literature, is that of enforcement, and the extent to which differences may influence the impact of IFRS regulation. For example, some literature has suggested that IFRS adoption can be expected to have a smaller effect in countries with weak enforcement regimes or where firms have poor reporting incentives to apply IFRS (Daske et al., 2008). Additionally, the United Kingdom can be classified as one of the top countries to possess a high enforcement threshold and reporting incentives (Hope, 2003; Leuz et al., 2003; La Porta et al., 2006). According to adoption should
these arguments then, IFRS
have a considerable impact on the value relevance of accounting
information in the UK and similar countries. Indeed, some studies have found that IFRS adoption has a significant impact on the value relevance in the UK (Iatridis, 2010) and Australia (Chalmers et al., 2011) due to these countries having a high level of enforcement. In addition, the reason why Gaston et al. (2010) observe a small effect of IFRS on the value relevance in Spain might be because of poor enforcement in that country, as Daske et al. (2008) propose. Nevertheless, this is contrary to what Gaston et al. (2010) found in their research, when they claimed that IFRS adoption had impacted negatively in the UK. This notion seems to conflict with the aforementioned argument of country-specific accounting system regarding the UK, claiming that IFRS should have a small impact on value relevance in that country due to the similarity between IFRS and local GAAP (Gaston et al., 2010).
20
A final factor observed by some commentators, is that of conservatism. Conservatism can be defined as being pessimistic in gaining any profits, but anticipating losses instead (Watts, 2003). Lev and Zarowin (1999) highlighted that changes in conservatism can possibly explain the variations of value relevance. Balachandran and Mohanram (2006) also determine that the value relevance of accounting information declines for firms with the least conservative accounting and does not change significantly for firms with the most conservative accounting.
In addition, Manganaris et al. (2011) investigate whether any potential change in the value relevance of financial reporting after IFRS adoption might result from such a change in the level of conservatism. The assumption is stronger conservatism corresponds to lower value relevance of earnings and vice versa. The results of their research provide evidence that after 2005, levels of conservatism decreased only in France and Germany. Contrary to expectations, value relevance of earnings had decreased throughout Germany, France and Greece. In another word, what they found empirically seems to be different to what they theoretically expected to find. There should have been an increase in the value relevance regarding France and German companies accounting information due to the experimental decrease in the level of conservatism after the IFRS adoption. It can consequently be observed that there is no proven pattern change in the value relevance with regard to increase and decrease in the level of conservatism within a given country.
21
2.4.
Conclusion
Consistent with the research hypotheses, this chapter has discussed some key published research into the value relevance of accounting information over time. Studies that consider value relevance issue in the light of IFRS adoption, have also been presented, as there is some useful examination of book value and earnings after the adoption of IFRS (2005-2012). Accordingly, this review of the literature identified a potential gap in research regarding the value relevance of accounting information in the UK after IFRS adoption and over time, especially post-2005. Consequently, it is hoped that this paper may offer a wider interpretation to this controversial field of investigation by looking into three as yet unexplored areas of investigation within the UK. First, it examines the value relevance over the eight years since the IFRS introduction, which covers a significantly longer time horizon than the previous studies. Second, it considers the value relevance of the explanatory variables (book value and earnings) both as separate features, and as a combined investigation Third, it investigates the potential impact of both industry category and firm size factors on the value relevance of book value and earnings. Therefore, this synthesis offers valuable insight into the literature around value relevance of accounting information for UK firms.
22
CHAPTER THREE Methodology
This chapter is divided into two main sections. Section 3.1 develops a set of hypotheses regarding the value relevance of book value and earnings. Section 3.2 describes and explains the data and research methods that used to examine the research hypotheses.
3.1.
Theoretical Framework and Hypotheses Development
The main areas of enquiry for this study address the value relevance of IFRS-based financial reporting to the LSE, particularly FTSE 250, participants. It will additionally investigate any potential change in value relevance over the considered time period (2005 to 2012). The study considers the substantial enhancement in the LSE informational environment, which occurred because of the introduction of IFRS. It also takes into account the requirement to immediately release any financial information that is likely to influence the financial and business position of the UK listed firms. On a theoretical basis, there was an expectation that the adoption of IFRS would, over time, increase value relevance due to a parallel increase in the level of compliance with IFRS (Alfaraih, 2009).
It is commonly agreed that as the informational gap between firm and market becomes smaller, investors will be more likely to accurately value that firm’s worth (Gjerde et al., 2005; Hillier et al., 2010). Several studies have globally examined the value relevance of book value and earnings over time. Some studies claim a significant increase in the value relevance of accounting information (Collins et al., 1997; Francis and Schipper, 1999). However, others confirm the opposite (Lev and Zarowin, 1999; Brown et al., 1999; Alfaraih, 2009; Khanagha, 2011). IFRS introduction is thought as one of the large change 23
in the accounting system ever (Punda, 2011; Qu et al., 2012). Value relevance of accounting data is presumably one of the affected issues in this process. Some argue that value relevance has improved after the IFRS introduction (Jermakowicz et al., 2007; Kousenidis et al., 2010; Aharony et al., 2010; Chua et al., 2012; Elias, 2012) while others claim no enhancement or indeed a negative movement (Hung and Subramanyam, 2007; Aubert and Grudnitski, 2011; Chalmers et al., 2011). Consequently, it is worth taking into consideration the potential change in the value relevance of accounting information after such an enormous modification to the whole accounting system.
Thus, this paper develops four hypotheses to address the main questions of the study regarding the value relevance of accounting information, book value of equity and earnings, after the IFRS adoption, of firms listed on the FTSE 250. As a consequence, the information that firms listed on the FTSE 250 presented from 2005 to 2012 concerning book value and earnings is predicted to be value relevant to market participants. Moreover, it is also predicted that the value relevance of book value and earnings increases over time due to a development in the financial statement information available to investors. Therefore, this paper hypothesises that: H1: Book value of companies listed on the FTSE 250 were value relevant to participants after IFRS adoption during the period 2005-2012. H2: Earnings of companies listed on the FTSE 250 were value relevant to participants after IFRS adoption during the period 2005-2012. H3: The value relevance of the book value of companies listed on the FTSE 250 enhanced over the 2005-2012 period. H4: The value relevance of the earnings of companies listed on the FTSE 250 enhanced over the 2005-2012 period.
24
3.2.
Data and Research Methods
This section contains three subsections. First, it provides a summary of the sample principles and methods of data collection, and an explanation of the experimental valuation models utilised. Secondly, it introduces the methods used to assess the value relevance of book value and earnings, and modifications in the value relevance over the identified time period. Lastly, the section discusses some possible factors that may affect the value relevance of both types of accounting information.
3.2.1. Time Period, Sample and Data Description This research covers an eight-year period from 2005 to 2012. This timeframe has been proposed for two reasons. First, the mandatory adoption date of IFRS in the UK was 1st January 2005, which is thought to have brought significant change in the accounting numbers (Punda, 2011; Qu et al., 2012). Further to this, the eight year-period is expected to illustrate a potential pattern in the level of value relevance of the UK accounting information after the adoption of IFRS.
The data required to investigate the value relevance of accounting information includes share prices, book values of equities, earnings per share, total assets and industry category. Bloomberg (2013) is the main source of the research data as it provides uptodate, accurate, industry-verified data/analysis. Similar to Collins et al. (1999) and Psaroulis (2011), this research determines stock price three months after the end of fiscal year (i.e. at 31st March). This is likely to guarantee that accounting information is available for public. Stock prices and accounting information are all presented in the GB pound sterling.
25
In order to reduce the chance of heteroscedastic disturbances and scaling effects, this study utilises the per share value of prices, book value and earnings. This is consistent with the recommendation of Barth et al. (1992) and Alfaraih (2009). The considered sample consists of the listed companies as traded on the FTSE 250 in LSE between 2005 and 2012. The sample selection criteria can be shown through two main principles. First, the essential financial statement information for a particular company,
(i.e. book value,
earnings and total assets), which are the independent variables, must be available for the year concerned. Secondly, stock prices of the firms (the dependent variable) must also be available for the whole year concerned. Applying these criteria to the whole population, the research sample consists of 1516 observations for the entire period.
3.2.2. Empirical Valuation Model Measuring Value Relevance The four study hypotheses (H1–H4) address the value relevance of accounting book value and earnings to FTSE 250 participants during the period of 2005-2012. Studies regarding value relevance usually test the relationship between stock price or stock returns, and a set of accounting data (Beaver, 2002; Kousenidis et al., 2010; Devalle et al., 2010). Specifically, the value relevance theory examines the potential effect of accounting data on equity valuation (Cormier and Magnan, 2010). Moreover, the value relevance research aims to provide empirical information to investors to assist with economic decisionmaking (Alfaraih, 2009). Consequently, value relevance provides investors with useful information, examining how much the value of a firm can be elucidated by or attributed incrementally to its accounting information.
26
Selection of either the price or returns model is contentious in the literature (Barth et al., 2001; Holthausen and Watts, 2001). Kothari and Zimmerman (1995) confirm that the response coefficients of price model are less biased. Consequently, this study employs price model of Ohlson (1995) to investigate the value relevance of accounting information in the UK context. The price model investigates the association between stock price and book value and earnings, as in Ohlson (1995).
Scholars seem to be interested in book value and earnings because they assume that these items can proxy the content of financial information. In other words, it is argued that book value and earnings present rational summaries of two key financial statements: the balance sheet and the income statement (Khanagha, 2011). Additionally, Alfaraih (2009, 106) claims that “book value of equity embodies capital input and past performance, while current earnings proxy for future performance”. Consistent with the ‘information dynamics’ theory of Ohlson (1995), other information may be considered beyond book value and earnings.
To assess the value relevance of accounting information, stock prices are regressed on the book value of equity and earnings for each year. This is supposed to explain deviations in stock prices. To test the relationship between stock prices and financial information, a yearly cross-sectional analysis of the statistical association, R2, is undertaken. This is consistent with Brown et al. (1999); Gjerde et al. (2005) among others writing in this field. If a significant statistical association between the variables is found, financial information is considered to be value relevant to investors. The results are subsequently subject to timeseries analysis in order to evaluate the significance and trend changes of value relevance over a given time period.
27
According to Ohlson’s (1995) model, a company’s share market value is equal to its book value plus a linear function of current abnormal earnings and the scalar variable representing other information. Ohlson’s Price model is thought to be extremely significant because it provides a theoretical link between firm value and accounting data (Bernard, 1995). Consequently, it provides a framework to explore and test the association between market value and financial information.
Ohlson’s theoretical model has been extensively used within the literature o empirically investigate the value relevance of accounting book value and earnings (Collins et al., 1997; Francis and Schipper, 1999; Lev and Zarowin, 1999; Gjerde et al., 2005; Gaston et al., 2010; Kouser and Azeem, 2011; Kargin, 2012). The model is specified as follows: Pit = β 0 +β1 BVPSit +β2 EPSit + εit
(1)
Consistent with Collins et al. (1997), to examine the relative explanatory power that book value and earnings independently have for stock prices, the following two equations are used: Pit = b0+ b1 BVPSit + εit
(2)
Pit = c0+ c1 EPSit + εit
(3)
Where Pit
=
Stock price per share for firm i at time t, three months after the end of the fiscal year of time t
BVPSit =
The book value per share of firm i at time t
EPSit
=
The earnings per share of firm i at time t
T
=
2005… 2012, corresponding to the years 2005–2012
Εit
=
Other relevant information
28
The primary metric used to measure the value relevance of accounting numbers is the statistical association between stock prices and both book value and earnings. This association can be measured by the explanatory power (R²) of the regression model. An association would exist between stock prices and book value and earnings only if the accounting variables are value relevant to investors. Consequently, the coefficients of those variables will be statistically significant. Any observed association can then be used to study the potential change in value relevance over the 2005-2012 period.
3.2.3. Changes in Value Relevance of Book Value and Earnings
To investigate any possible modification in value relevance over the research period (20052012), the obtained annual association between stock prices, book value and earnings, as measured by the adjusted R2, is employed. This is consistent with Collins et al. (1997); Francis and Schipper (1999); Gjerde et al. (2005); Alfaraih (2009). The adjusted R2 is regressed on a time trend variable, as shown below: R²Both = a0 + a1 TIME + ε
(4)
R²BVPS = b0 + b1 TIME + ε (5) R²EPS = c0 + c1 TIME + ε
(6)
Where R²Both
=
R²BVPS
=
R²EPS
=
TIME
=
The adjusted R² values have been obtained from the yearly cross-sectional regression of BVPS and EPS together The adjusted R² values have been obtained from the yearly cross-sectional regression of BVPS The adjusted R² values have been obtained from the yearly cross-sectional regression of EPS 2005… 2012, corresponding to the years 2005–2012.
29
If the estimated time coefficient appears significantly positive at conventionally significance levels, the value relevance of book value and earnings is presumed to have increased over time. However, the value relevance of the accounting variables is assumed to have declined over time if a significant negative coefficient estimate is observed (Collins et al., 1997; Francis and Schipper, 1999; Gjerde et al., 2005).
3.2.4. Factors Influencing Value Relevance of accounting information
A number of research studies have claimed that several factors can influence the value relevance of book value and earnings. Such factors can include industry categories (Francis and Schipper, 1999; Ballas and Hevas, 2005; Hellstrom, 2006), and size of company (Collins et al., 1997; Bae and Jeong, 2007; Alfaraih, 2009). These factors and their potential impacts are considered below.
The Effect of Industry Category
To investigate the impact of industry categories on book value and earnings, the sample has been apportioned according to industry sectors, consistent with Ballas and Hevas (2005) and Alfaraih (2009). Firms listed on the FTSE 250 are divided into ten sectors: industrial, basic materials, financial, consumer services, consumer goods, oil and gas, utilities, technology, healthcare and telecommunication. Nevertheless, due to the similarities among some sector operations, and to avoid groups with a small number of companies, this study combines some of the sectors into one category.
30
The basic material and industrial sectors are combined into one industry category. Both consumer services and goods are compounded into one retail and consumer group, and oil and gas are combined into one energy category. Another category, named others, comprises a combination of technology, telecommunication and health care sectors. Thus, the entire sample is partitioned into five industry categories. Subsequently, four dummy variables for the industry categories are incorporated into the extended model as control variables, in order to capture their predicted influences on the value relevance. The relative research hypothesis assumes that: H5: There are industry-specific differences in the valuation of book value and earnings. The Effect of Firm Size
To investigate the influence of firm size, the sample has been divided into large and small companies. The median of the logarithm of total assets is employed as a relative size measure (Barth et al., 1998; Bae and Jeong, 2007, Alfaraih, 2009). Firms with total assets lower than the median are classified as small firms, whereas the remaining companies are classified as large. A dummy variable of the logarithm of total assets is created and used as a continuous measure in the extended model, in order to capture the expected influence of size on value relevance. The relative research hypothesis assumes that: H6: There are firm-size differences in the valuation of book value and earnings.
31
3.2.5. Extended Models The extended research model that incorporates industry categories and firm size as control variables is as follows: Pit = β0 + β1 BVPSit + β2 EPSit + β3 D_IND + β4 D_FIN + β5 D_RE&CO + β6 D_ENE +β7 D_SMALLit + εit
(5)
Where
Pit
=
Stock price per share for firm i at time t, three months after the end of fiscal year of time t
BVPSit
=
The book value per share of firm i at time t
EPSit
=
The earnings per share of firm i at time t
D_IND
=
Dummy variable that equals 1 for firms in the industrial category and 0 otherwise.
D_FIN
=
Dummy variable that equals 1 for firms in the financial institutions category and 0 otherwise.
D_RE&CO
=
Dummy variable that equals 1 for firms in the retail and consumer category and 0 otherwise.
D_EN
=
Dummy variable that equals 1 for firms in the energy category and 0 otherwise. The omitted industry category is the real estate category when all categories are zero.
D_SMALLit =
Dummy variable of the logarithm of total assets of firm i at time t
t
2005 … 2012, corresponding to the years 2005–2010
=
32
3.3.
Conclusion
In conclusion, this chapter develops the research framework and hypotheses in order to address the
objectives of the study and research questions. The value relevance of
accounting information, book values and earnings (H1 and H2), is predicted to be value relevant to FTSE 250 investors. Furthermore, the value relevance of the FTSE 250-listed firms’ book values and earnings (H3 and H4) is expected to have increased during the 2005–2012 period.
33
CHAPTER FOUR Results of Value Relevance of Accounting Information This chapter presents and discusses the results of measuring the value relevance of book value and earnings presented by companies listed on the FTSE 250 between 2005 and 2012. The chapter is divided into two main sections. Section 4.1 shows descriptive statistics for, and bivariate correlation between, the research variables. In section 4.2, the results of data analysis of value relevance of book value and earnings in respect of the proposed hypotheses are presented.
4.1. Descriptive Statistics 4.1.1. Descriptive Statistics for the Model’s Variables Based on the pooled cross-sectional, time-series sample, table 4.1 provides descriptive statistics for the dependent and independent variables employed in the valuation model. However, the additional details of annual descriptive statistics are presented in the appendix section (Appendix A) in order to show changes in the figures over the period.
Table 4.1: Descriptive Statistics for 2005-2012 Observations* Variables
N
Mean
Median
Std. Dev.
Min.
Max.
Skewness
Kurtosis
Pit
1516
5.20
3.62
5.13
0.13
48.35
2.80
12.22
BVPSit
1516
2.45
1.48
3.84
-1.29
54.34
7.95
93.09
EPSit
1516
0.34
0.24
0.61
-4.74
9.79
3.41
49.91
SIZEit
1516
2366.6
980.1
7998.9
25.8
131560.5
11.61
156.07
* All numbers are in Great Britain Pound sterling (GBP). The variables can be defined as follows: N represents the number of observations; Pit is the stock price per share for a firm at 31st March; BVSit is the book value per share of a firm at 31st December; EPSit is the earnings per share of a firm over the period; and SIZE is the total assets of a firm at 31st December (£ million).
34
Table 4.1 indicates that the median (mean) stock price per share for the eight-year period was about £3.62 (£5.20), ranging from £2.30 in 2008 to £5.09 in 2006 (see Appendix A). The table also illustrates the median (mean) book value per share during the study period to be £1.48 (£2.45), ranging from £1.19 in 2005 to £1.81 in in 2011. Furthermore, the median (mean) earnings per share over the eight-year research period is £0.24 (£0.34), ranging from £0.15 in 2009 to £0.32 in 2007 (also see Appendix A). The median size (total assets) for the pooled sample is £980.08 m. Appendix A shows that firm size has increased over the 8-year period.
Testing the research data year-by-year for normality using SPSS, the Shapiro-Wilk indicates that BVPS and EPS for the all eight-year are normally distributed. Therefore, data transformation does not seem to be necessary. However, the total asset variable is transformed using a natural log transformation (LSIZE) due to the variation from normality. Both skewness and kurtosis dramatically reduced to 0.473 and 1.603 respectively, as a consequence of the transformation process. This also brought the median (mean) total assets to 8.99 (9.02) with 0.46 standard deviation. Thus, the research is able to confidently find that the proposed variables are normally distributed.
Outlining the research sample in respect of industry sectors, the total sample of firms have been categorised into five categories: industrials, financials, retail & consumer, energy and other firms. These are shown in table 4.2.
35
Table 4.2: firms listed on FTSE 250 in Industry Category 2005-2012 Year
2005 2006 2007 2008 2009 2010 2011 2012 Total
Industrials
Financials
Retail & Consumer
Energy
Others
Total
47
29
51
12
12
151
31%
19%
34%
8%
8%
100%
63
43
59
16
14
195
32%
22%
30%
8%
7%
100%
71
40
58
15
14
198
36%
20%
29%
8%
7%
100%
65
34
63
17
15
194
34%
18%
32%
9%
8%
100%
59
35
66
16
20
196
30%
18%
34%
8%
10%
100%
56
38
61
14
21
190
29%
20%
32%
7%
11%
100%
65
39
55
11
24
194
34%
20%
28%
6%
12%
100%
60
44
58
12
24
198
30%
22%
29%
6%
12%
100%
486
302
471
113
144
1516
32%
20%
31%
7%
9%
100%
Table 4.2 shows a year-by-year breakdown of the number of firms in each industry category during the 2005 to 2012 period. The table demonstrates that the composition of firms listed on the FTSE 250 changed over the study period, with a proportional increase in the number of firms in the ‘Others’ category and a proportional decrease in the number of firms in the retail & consumer group. In addition, table 4.2 shows that nearly 63% of the full sample of firms listed on the FTSE 250 are divided almost equally between the industrials and retail & consumer categories. However, the smallest number of firms can be found in the categories of energy and other, 113 and 144 respectively out of 1516 firms.
36
4.1.2. Bivariate Correlation Results Table 4.3 presents Spearman’s correlation and Pearson's correlation among the sample variables. These analyses are expected to show whether the problem of multicollinearity exists among the variables. The results indicate that the independent variables are significantly correlated to the dependent variable, and to each other. The pairwise correlations are generally significant at 1%. The only negative correlation is between stock price and firm size. In addition, the table shows that this statistical problem does not exist among the research variables because none of the pair correlation coefficient between the variables excesses of 0.8. As Gujarati (2003) highlights that multicollinearity does not occur when pair correlations smaller than 0.8.
Table 4.3: Bivariate Correlations among Dependent and Independent Variables over the 2005-2012 Period Variables
P
BVPS
EPS
LSIZE
P BVPS EPS LSIZE
1.00 0.54** 0.53** -0.14**
0.55** 1.00 0.49** 0.19**
0.64** 0.50** 1.00 0.030
-0.15** 0.13** 0.28 1.00
Notes: ** Correlation is significant at the 0.01 level (two-tailed). The lower-left diagonal shows Pearson's correlation and the upper-right diagonal shows Spearman's correlation among the variables.
37
4.1.3. Checking Assumptions of the Multiple Regression Analysis In addition to the normality and multicollinearity tests, the data set has been examined to remove the risk of other potential statistical problems, and thus to ensure that the multiple regression results are unbiased and reliable. To reduce the effects of extreme values, the smallest and largest one-half percent of the observations for each regression variable were excluded . Such extreme data points, well outside the norm, can arise for a number of reasons, and are termed ‘outliers’. Removing them is consistent with previous research (Kothari and Zimmerman, 1995; Collins et al., 1997; Ball et al., 2000). This results in a more reliable and strong correlation coefficient of the regression model.
Furthermore, heteroscedasticity analysis is employed on the data set: use of panel data in this research results in a possibility of the observations not having constant variance across the years. This test is recommended by researchers in the case of using panel data (Kothari and Zimmerman, 1995; Hill et al., 2008). As a consequence, the results of the test show that heteroscedasticity is not likely to be a serious problem regarding the observations of this research. In other words, heteroscedasticity can be distinctly observed regarding the sample data involved in this research.
38
4.2. Empirical Results
4.2.1. Value Relevance Of Book Value and Earnings (H1 and H2) This research hypothesises that the information provided concerning book value (H1) and earnings (H2) was value relevant to FTSE 250 participants between 2005 and 2012. Price model, which expresses firm value as a linear function of book value, earnings and other value relevant information, was used to investigate these hypotheses. According to this model, developed by Ohlson (1995) and applied in many subsequent empirical studies, this investigation used the following equation to examine the relationship between stock price and book value and earnings: Pit = a0+ a1 BVPSit + a2 EPSit + εit
(1)
Drawing on the work of Collins et al. (1997), the following two models were also employed to determine the relative explanatory power that book value and earnings value individually have in respect of stock prices: Pit = b0+ b1 BVPSit + εit Pit = c0+ c1 EPSit + εit
(2) (3)
As has been mentioned in the methodology (Chapter 3), the adjusted R² from models (1-3) is the key indicator of the value relevance of financial statement information. Supplementary to the adjusted R², the significance of the explanatory variable coefficients can be used to indicate the value relevance of explanatory variables, separately.
Table 4.4 presents the annual cross-sectional and pooled results of the regressing price on both book value and earnings together (model 1) and severally (models 2 and 3).
39
Table 4.4: Yearly Cross-Sectional and Pooled Regression of Price on Book Value and Earnings 2005-2012 (1)
Year
Pit = a0+ a1 BVPSit + a2 EPSit + εit
N
2005
151
2006
195
2007
198
2008
194
2009
196
2010
190
2011
194
2012
198
Pooled 1516
(2)
a1
a2
0.94
5.91
(7.07)**
(6.36)**
0.84
5.8
(5.38)**
(6.21)**
0.44
1.48
(3.25)**
(1.98)*
0.5
1.922
(10.41)**
(7.77)**
1.01
2.48
(8.15)**
(4.95)**
0.25
4.28
(3.07)**
(6.71)**
0.25
5.47
(3.67)**
(9.07)**
0.33
4.87
(4.06)**
(6.86)**
0.49
2.97
R2Both
F Stat.
0.591
109.34**
0.616
156.40**
0.335
50.70**
0.442
77.38**
0.362
56.32**
0.447
77.3**
0.526
108.24**
0.405
67.96**
ε
Pit = b0+ b1BVPSit + it
b1 1.43 (11.86)** 1.59 (15.15)** 0.67 (9.79)** 0.46 (8.49)** 1.14 (8.86)** 0.63 (9.42)** 0.6 (9.71)**
R2BVPS 0.482
0.541
0.325
0.269
0.285
0.317
0.326
0.65
c1 9.77 (11.27)** 9.75 (15.74)** 3.57 (9.30)** 1.68 (5.45)** 3.33 (5.882)** 5.61 (11.79)** 6.83 (13.80)**
R
EPS
0.457
0.56
0.303
0.13
0.147
0.422
0.496
0.358 (10.52)** 4.51
0.297 (25.3)**
2
6.46
0.73 488.27**
(15.38)**
ε
Pit = c0+ c1 EPSit + it
0.265 (8.48)**
0.391 (15.99)**
(3)
0.289 (24.84)**
NOTES: ** correlation is significant at the 1 % level, * significant at the 5 % level (two tailed); t-statistics are in brackets.
The consequences of pooled sample regression of model (1), suggest that the model is statistically significant (F = 488, p < 0.01). The adjusted R² for the pooled sample regression of model (1) shows that book value and earnings together explain 39% of the firms’ stock price variations in FTSE 250 over the 2005-2012 period. Furthermore, the consequences of the pooled data demonstrate that the estimated coefficient of both book value and earnings positively and significantly (p < 0.01) affect stock prices. This would suggest that book value and earnings are considerable factors in determining firms’ stock valuation in respect of the FTSE 250. 40
In addition, the results of annual regression are likely to be consistent with the pooled outcomes. The adjusted R² of the year-by-year cross-sectional regressions of stock price on book value and earnings (model 1) ranged from 33% in 2007 to 61% in 2006, with a median (mean) of 44% (46%). The estimated coefficient of book value and earnings show positive and significant (p < 0.01 or < 0.05) impacts in each year. Similar results are presented for the independent regressions of stock prices on each book value and earnings (models 2 and 3). The figures for adjusted R2 seem to be in decline for all the three models over the research period (2005-2012). (This is subject to further consideration in the following subsection).
The results in table 4.4 show that the average coefficients of both book value and earnings are positive and significant (p < 0.01 or < 0.05) across all equations. Therefore, it can be claimed that the findings strongly support the hypotheses that financial information, book value (H1) and earnings (H2), of firms listed on the FTSE 250 were value relevant to investors during the 2005–2012 period. In other words, accounting information was value relevant in the UK after IFRS adoption.
The findings of the price regression on the combination of book value and earnings are consistent with the results obtained from the post-IFRS period (Iatridis, 2010 and Gaston et al., 2010) regarding the UK financial information and about Australia (Chalmers et al., 2011). The results Iatridis (2010) produced regarding book value and net profit per share, indicate that accounting information can explain 32% of variation in the UK security prices after the adoption of IFRS. This compares, however, to about 70% of stock price valuation after IFRS adoption in Australia between over 2005-2008 (Chalmers et al., 2011). This current research found that the value relevance of book value and earnings per share could explain 39% of the cross-sectional variation in stock price for firms on FTSE 250 in the UK over the past eightyears post-IFRS (2005-2012). 41
The value relevance of financial statement information during the eight years after IFRS adoption (2005-2012) in the UK, is higher by 7% than the figure proposed by Iatridis (2010) regarding the same market. There are two main possible reasons behind this difference in the results. First, Iatridis (2010) investigates value relevance post-IFRS adoption in 2005 only, while the present study examines this issue over an eight-year period following the introduction of IFRS. This is likely to provide a deeper insight into the impact of IFRS adoption on the value relevance of accounting information within the UK, as compared with other shorter studies in the literature. Secondly, this current study follows the well-known models of Ohlson (1995) and Collins et al. (1997) in using book value and earnings per share to investigate the role of accounting information in explaining stock price fluctuations, whereas Iatridis (2010) uses net income per share as an independent variable instead of earnings.
Both Aharony et al. (2010) and Devalle et al. (2010) confirm a significantly higher level of R2 (over 70%) over the first three years of IFRS adoption, when investigating the association between stock price and accounting information. The factor that makes this difference might be the use of variables in the price regression model. Both studies use other accounting information in the equation, such as annual dividends per share and R&D expenses. Thus, it can be clearly illustrated that it is possible to obtain different results regarding the UK after IFRS adoption.
Additionally, when comparing the results of this paper to those of previous studies in other countries who tend to have different accounting system, the book value of equity and earnings of the UK firms seem to be less value relevant. For example, Morais and Curto (2009) argue that book value and earnings explained 0.43 and 0.47 of stock price valuations after IFRS adoption in Spain and Belgium respectively. Devalle et al. (2010)
42
found the regression coefficient of 0.51 and 0.80 between accounting data and stock price in Germany and France respectively over 2005-2007. Furthermore, Norway and Finland’s financial information presented the adjusted R2 of 0.65 and 0.85 respectively over 20052006 (Aharony et al., 2010). However, the current study found only 39% regarding the UK accounting information. This is consistent with the argument that IFRS adoption has a greater impact on the value relevance of accounting information in the European continental (code law) countries, rather than the Anglo-Saxon (common law) ones (Paananen and Parmar, 2008; Gaston et al., 2010; Tsalavoutas and Evans, 2010; Punda, 2011), reasoning that both IFRS and common law system have similar accounting systems. Thus, the impact of IFRS on value relevance should be smaller in the UK compared to the code law countries. This premise is strongly supported by the findings of this current research.
Interestingly, however, this also seems to be contrary to, and in conflict with, the debate around the level of enforcement. IFRS adoption is thought to have a greater impact on value relevance within regimes that apply a high level of enforcement (Daske et al., 2008). Thus, theoretically, this impact should be higher regarding the UK in comparison to countries with low enforcement regimes, using the argument that the UK embraces a high level of enforcement (Hope, 2003; Leuz et al., 2003; La Porta et al., 2006). Consequently, this study has observed the opposite to be the case, finding a regression coefficient of only 39% regarding the UK accounting information after IFRS adoption over the 2005-2012 period. However, the same figure in Spain was 43% in 2005 (Morais and Curto, 2009) and 73% over 2005-2006 (Aharony et al., 2010), despite the poor enforcement system within the country. (Gaston et al., 2010).
43
To sum up, the results of regression analysis provide compelling evidence that the book value and earnings reported by firms listed on the FTSE 250,
between 2005 and 2012, following
from the IFRS adoption, played a significant role in equity valuation. The results are likely to support the argument about country-specific accounting systems, but reject the existing literature regarding enforcement policy. Nevertheless, comparing the results of this study to those of a previous UK-based one, value relevance research shows that the explanatory power of both book value and earnings has decreased over the post-IFRS induction period. The identified changes in the value relevance of book value and earnings over IFRS-period are now examined in the following subsection.
4.2.2. Changes in the Value Relevance of BVPS and EPS over 2005-2012 (H3 & H4)
One of the main aim behind the adoption of IFRS is to improve the value relevance of accounting information for market participants (Epstein and Jermakowicz, 2008) in order to enhance the efficacy of financial statement information within financial decisions making processes (Epstein & Mirza, 2002). It was expected that the influence of IFRS on value relevance would increase over time for three reasons: IFRS is thought to be different from the applied local accounting system. Therefore, related employers (and employees) need time to acquire experience and be trained in order to able to respond to the rules appropriately. Even though the providers of information are often accomplished, auditors and users of accounting information, both still need time to understand the potential ‘new tricks’ adequately. It may be the case that levels of compliance could rise over time, which would positively affect the value relevance of accounting information (Alfaraih, 2009). Therefore, it is anticipated that the IFRS may have a stronger positive effect on the value relevance of accounting information in the long run. In other words, this research expected to find that the value relevance of book value (H3) and earnings (H4) showed an increase between 2005-2012, in contrast to the actual findings. 44
According to the research design, the change in value relevance was considered by regressing the adjusted R-squares, which were obtained from annual cross-sectional regressions of stock price on book value of equity and earnings together and separately, on a time trend. Thus, time trend is assumed as an independent variable (TIME). Table 4.5 illustrates the consequences.
Table 4.5: Linear Regression of the R2Both, R2BVPS and R2EPS on a Time-Trend Variable 2005-2012 (4) 2
R
Both
(5)
= a0 + a1 TIME + ε
Constant
a1 TIME
0.54
-0.02
(6.94)*
(-1.14)
R2
2
R
BVPS
(6)
= b0 + b1 TIME + ε
Constant
b1 TIME
0.49
-0.03
(8.38)**
(-2.67)*
0.179
R2
2
R
EPS
= c0 + c1 TIME + ε
Constant
c1 TIME
0.39
-0.007
(2.99)*
(-0.29)
0.543
R2 0.014
** Correlation is significant at the 1% level, * significant at the 5% level (two tailed).
Table 4.5 demonstrates that the TIME coefficient (b1) regarding the value relevance of the book value of equity (model 5) is negative (-0.03) and has a statistically significant level (p < 0.05). This seems to indicate that the value relevance of book value has declined over the study period (2005-2012) in the UK. The coefficient shows that the value relevance of book value has declined by 0.03 each year during the eight years. Similar results are obtained regarding the two other models (4 and 6). The findings show that time in fact appeared to have a negative consequence on the value relevance of both book value and earnings together and earnings independently, giving -0.02 and -0.007 respectively. However, as these are low figures, the values are statistically insignificant.
To illustrate the trend of the value relevance of accounting information in the UK over the research period, the following scatter line (Figure 4.1) is presented. The changes in the 45
value relevance of book value and earnings together, and individually, are drawn from 2005 to 2012. A detectable reduction can be observed regarding all the three presented lines. Thus, the value relevance of book value and earnings together and independently has declined over the period. Although a remarkable decline occurred in the value relevance of earnings over 2008-2009, the value relevance of book value has continued to decline gradually even after 2010. Consequently, it is difficult to verify that the decline in the value relevance of either book value or earnings has had a stronger influence in the overall value relevance decrease.
Figure 4.1: Trend Change of value relevance over 2005-2012 0.70 0.60
Adjusted R2
0.50 0.40 Both 0.30
BVPS
0.20
EPS
0.10 0.00 2005
2006
2007
2008
2009
2010
2011
2012
Year
Contrary to the expectation of this study, value relevance of book value and earnings has declined over the 2005-2012 period in the UK. As a result, the research hypotheses (H4 and H5) can be rejected in favor of accepting the alternatives, which expect decreases over time. The hypotheses were based on the assumption that the advantages of IFRS implementation regarding the value relevance were expected to increase over the study period. Hence, it was predicted that accounting data would become more relevant to investors’ valuation decisions.
46
This result is consistent with some research findings in the current literature (Brown et al., 1999; Lev and Zarowin, 1999; Alfaraih, 2009). One of the common and plausible explanations is that investors are less likely to rely on the financial information. Alternatively, they may increasingly depend on non-financial information in making their economic decisions regarding stock valuation. For example, investors can access and interpret other relevant information from non-financial sources worldwide, due to evergrowing globalisation and technology. They subsequently make their marketing and economic decision based on that information in addition to accounting information. Therefore, the observed decline in the value relevance of book value and earnings could arguably be due to an increase in the reliance of investors on non-financial information over the period.
It is thought that information, particularly non-financial, is widely available in the market regarding large firms and firms in the consumer category. Therefore, this research expected to note a greater decline in the value relevance of financial information reported by these types of companies. The reason for that decline was considered an increase in the nonfinancial information availability. However, the coefficient of time from time-series regression analysis indicates that value relevance has declined over 2005-2012 for both groups by only 0.017 and 0.023 respectively. This is contrary to the research expectation as by comparison, there was a greater decline (0.03) in the value relevance across the entire sample over the period. Thus, it is proposed that other relevant factors also caused the decline, not only the dependence of investors on non-financial information. For example, the decline in the level of compliance to regulations might be a plausible reason, as Alfaraih (2009) found a positive and significant relationship between the value relevance of accounting information and the level of compliance with IFRS.
47
However, to ensure that the findings of this research are sufficiently robust, the next subsection investigates whether the value relevance of accounting information has similarly declined over the post-IFRS period in respect of all the industrial categories within the research sample. Therefore, the research examines the value relevance of book value and earnings of the category of industrial firms, as a deliberately chosen sample, consisting of a large proportion (32%) of the pooled sample. This could provide stronger evidence regarding changes in value relevance in a particular industrial category of the UK firms. Figure 4.2 presents changes in the value relevance of book value and earnings in the UK industrial firms over 2005-2012. Figure 4.2: Trend Change of the Value Relevance of BVPS & EPS regarding the Industrial Firms (2005-2012) 0.9 0.8 0.7 Adj. R2
0.6
Both
0.5
BVPS
0.4
EPS
0.3 0.2 0.1 0 2005
2006
2007
2008
2009
2010
2011
2012
Year
Figure 4.2 indicates that the value relevance accounting information for industrial firms has declined over the period by 0.034, 0.079 and 0.014 concerning BVPS&EPS, BVPS and EPS respectively. It seems that the decline in value relevance of book value had a significant impact on the decrease in the overall value relevance of accounting information. Thus, value relevance of accounting data reported by UK firms listed on the FTSE 250 is likely to have decreased regardless.
48
4.2.3. Factors Influencing the Value Relevance of Book Value and Earnings
Industry Category To investigate the potential influence of the industry category on the value relevance of book value and earnings, the polled sample was partitioned into five sub-samples: industrials, financials, retail & Consumer, energy and others. Accordingly, four dummy variables were created and incorporated into the research models (1, 2 and 3). Thus, the impact of industry category on the value relevance of book value and earnings both together and separately can be examined and interpreted. Table 4.6 shows the results of the regression analysis.
Incorporating dummy variables for industry categories, variation can be observed in the association between stock prices and both accounting information together and separately. The adjusted R2 has steadily increased in all the three cases; BVPS&EPS, BVPS and EPS. However, the coefficient estimates of book value and earnings seem to be declining in comparison with the estimated coefficient in the models (1, 2 and 3), when the impact of industry category is not considered. These results may potentially indicate that industry classification has had significant influence on the value relevance of book value and earnings reported by the firms listed on the FTSE 250 between 2005-2012.
The coefficient values of the dummies demonstrate the value relevance the related industry category compared to the other groups. The financial dummy (D_FIN) coefficient was negative and significant (p< 0.05) in model (7) and (8), suggesting that the value relevance of both book value and earnings together, and book value individually, was lower for financial firms in the UK between 2005-2012. Nevertheless, the positive and significant (p< 0.05) coefficient of the industrial dummy (D_IND) in model (8) confirms that the value relevance of book value was higher for industrial firms compared to the other industry categories.
49
Table 4.6: Pooled Sample Regression of Price on BVPS, EPS and Dummies of Industry Categories Models: Pit = a0 + a1 BVPS + a2 EPS + a3 D_IND + a4 D_FIN + a5 D_RE&CO + a6 D_ENE + ε
(7)
Pit = a0 + a1 BVPS + a2 D_IND + a3 D_FIN + a4 D_RE&CO + a5 D_ENE + ε
(8)
Pit = a0 + a1 EPS + a2 D_IND + a3 D_FIN + a4 D_RE&CO + a5 D_ENE + ε
(9)
Variables BVPS
Model (7)
Model (8)
0.52
0.76
(16.88)**
(25.74)**
2.93
EPS
--
(15.21)**
Model (9) -4.49 (24.58)**
0.57
0.8
0.6
(1.51)
(1.99)*
(1.46)
-0.96
-0.9
0.05
(-2.35)*
(-2.06)*
(0.13)
-1.33
-0.08
-0.01
(-0.35)
(-0.21)
(-0.02)
0.087
0.467
0.38
(0.17)
(0.87)
(0.7)
Adj. R
0.401
0.309
0.29
F-Stat
(169.71)**
(136.51)**
(124.77)**
D_IND D_FIN D_RE&CO D_ENE 2
N
1516
** Correlation is significant at the 1% level, * significant at the 5% level (two-tailed); t-statistics are in brackets.
Firm Size To study the impact of firm size, the pooled sample was also divided, this time into two groups; large and small companies. The relative size measure used is the median of the logarithm of firms’ total assets (Barth et al., 1998; Bae and Jeong, 2007, Alfaraih, 2009). Firms were classified as small when their total assets were smaller than the median (8.99), 50
whereas the total assets of large firms were expected to be greater than the median (8.99). Table 4.7 illustrates the results of regression.
Table 4.7: Pooled Sample Regression of Price on BVPS, EPS and Dummy of Firm Size Models: Pit = a0 + a1 BVPS + a2 EPS + a3 D_SMALL + ε Pit = a0 + a1 BVPS + a2 D_SMALL + ε Pit = a0 + a1 EPS + a2 D_SMALL + ε Variables BVPS
Model (10)
Model (11)
0.55
0.78
(17.92)**
(27.36)**
2.89
EPS
(10) (11) (12)
--
(15.34)**
Model (12) -4.56 (25.35)**
1.93
2.08
1.25
(9.46)**
(9.51)**
(5.66)**
Adj. R2
0.425
0.336
0.303
F-Stat
(374.37)**
(384.35)**
(330.86)**
D_SMALL
N
1516
** Correlation is significant at the 1% level (two-tailed); t-statistics are in brackets.
Compared with the results of models (1, 2 and 3), the models (10, 11 and 12) present higher value relevance of book value and earnings together and separately. However, the estimated coefficients led this figure to become smaller after incorporating the size dummy into the equation. This is likely to indicate that firm size had some influence on the value relevance of book value and earnings in the research sample. Additionally, table 4.7 demonstrates that the coefficients of dummy for small firms (D_SMALL) are positive and statistically significant (p< 0.01) for all the three models, indicating that value relevance was higher for smaller firms in the FTSE 250 that the large companies.
51
4.2.4. Extended Research Model Additional to the separate investigations into the influence of industry category and firm size factors, this sub-section now incorporates both factors into the research model (1) as control variables to capture their impact. The extended model is:
P = β 0 + β 1 BVPS + β 2 EPS + β D_SMALL + ε
3
D_IND + β 4 D_FIN + β 5 D_RE&CO + β 6 D_ENE + β
7
(5)
Table 4.8: Regression Results of the Extended model Variables Constant
Coefficient 1.62
T-Statistic (4.51)**
BVPS
0.56
(18.28)**
EPS
2.85
(15.17)**
D_IND
0.8
(2.17)*
D_FIN
-0.33
(-0.81)
D_RE&CO
0.28
(0.75)
D_ENE
0.49
(1.0)
D_SMALL
1.83
(8.85)**
N
Adj. R2
F-Statistic
1516
0.43
(164.12)**
** Correlation is significant at the 1% level (two-tailed)
Including the control variables, the regression results indicate that the estimated coefficients of book value and earnings are positive and statistically significant (p < 0.01). Consistent with the previous findings, the coefficient of firm size (D_SMALL) is positive and significant (p < 0.01). Additionally, the control variable of industry categories has both negative or positive coefficient value (i.e. different from zero). However, only the coefficient of industrial firms is statistically significant (p< 0.05).
52
Overall, the consequences of this study are likely to be consistent with the current literature which explores possible effects of factors, such as firm size (Collins et al. 1997; Gjerde et al, 2005; Alfaraih, 2009) and industry category (Francis and Schipper, 1999; Ballas and Hevas, 2005; Hellstrom, 2006), on the value relevance of book value and earnings.
4.2.5. Summary of the Results As expected, results of regression analysis provide evidence that accounting information, book value and earnings has been value relevant to the investors’ stock price valuation regarding firms listed on the FTSE 250 in each year from 2005 to 2012. Thus, both research hypotheses (H1 and H2) concerning the value relevance can be accepted. The research findings align with the relative literature for the value relevance.
The consequences of further findings suggest that the value relevance of book value and earnings may have significantly declined over the studied period. These findings are contrary to the research hypotheses (H3 and H4), which predicted an increase in the value relevance of accounting information over post-IFRS adoption period in the UK. Therefore, the study hypotheses concerning the change in value relevance over time can be rejected in favor of the alternatives. The partial reason for this decline is thought expected to be an increase in the use of non-financial information in the process of economic decision-making.
Consistent with the literature, the findings of this paper claim that factors such as firm size and industry category, do have a potential influence on the value relevance of book value and earnings. For smaller firms, value relevance of both accounting variables tended to be higher than what was observed for large firms during the 2005-2012 period. Regarding industry category, value relevance seemed to vary across industry categories due to a variation in their fundamental economic activities.
53
CHAPTER FIVE Conclusion This chapter attempts to summarise and synthesise the previous chapters and additionally, discusses the key results concerning overall objective and research questions. It is divided into three sections: Section 5.1 presents a summary and discussion of the research results. Section 5.2 goes on to report the paper’s main contributions and implications. In the final section (5.3), the study’s limitations and possible fields for future research will be highlighted.
5.1.
Summary and Discussion of results
Prompted by the scarcity of detailed studies around the value relevance of financial statements’ information after IFRS adoption in the UK, this study proposed three main objectives. The first was to investigate the value relevance of accounting information produced by companies listed on London Stock Exchange, FTSE 250. The second was to examine the possible changes in the value relevance of financial reports over the 20052012 period. Finally, the study aimed to examine whether other possible factors, such as firm size and industry category, significantly influence the association between accounting information and stock prices. Based on the research objectives, the following research questions have been considered: 1- Was accounting information, book value and earnings, value relevant to participants in the UK following the adoption of IFRS, between 2005 and 2012? 2- Did the value relevance of book value and earnings change over that period (2005-12)? 3- Did factors such as firm size and industry category have any impact on the value relevance of book value and earnings over the period?
54
Chapter 2 presented a literature review regarding the value relevance of accounting information. In doing so, the chapter concentrated on three main aspects. First, the concept of ‘value relevance’ as applied to accounting information was introduced. A number of peer-reviewed published studies were presented and discussed. Secondly, research that had investigated changes in the value relevance of accounting information over time, was highlighted and evaluated. Both increases and decreases have been reported in the literature and different explanations have been presented consequently. Finally, several papers, which consider the impact of IFRS adoption on the value relevance of accounting information, were brought together for analysis.
A large proportion of the overall research carried around the value relevance of financial reports’ information has been conducted in the last two decades. The impact of IFRS adoption is one area that researchers into value relevance of accounting information have concentrated on. More specifically, many papers have investigated this impact globally, undertaking comparisons between or inside countries and regions. Accordingly, various evidence has been illustrated showing that IFRS adoption generally tends to influence value relevance positively or negatively. However, little research had been carried out to investigate specific changes, whether increases or decreases, in the value relevance of accounting information over time since the adoption of IFRS.. Therefore, this paper aimed to address this gap, with its research into UK context and data.
55
Chapter 3 developed six research hypotheses to address the objectives and questions of the research. Two of the hypotheses addressed the value relevance of book value and earnings at single points of time after IFRS adoption (2005-2012), whereas a further two hypotheses focused on the changes in the value relevance of book value and earnings over the 8 years of post-IFRS adoption. The remaining two hypotheses examined the potential impact of firm size and industry category factors on the value relevance of accounting information.
To assess the value relevance of accounting data, the price model of Ohlson (1995) was used. The study hypothesised that both book value and earnings were value relevant to participants on the FTSE 250. Furthermore, it predicted that the value relevance of book value and earnings, presented by firms listed on FTSE 250, increased after IFRS adoption over the research period (2005–2012).
Chapter 4 empirically tested the collected data based on the research hypotheses. The results of annual cross-sectional regression showed that both book value and earnings were, together and individually, significantly and positively related to stock prices. The results of pooled panel regression also illustrated that book value and earnings have a significant and positive impact on the explanation of stock price to FTSE 250 over 20052012. The adjusted R2 shows that book value and earnings could jointly explain about %39 of the variation in stock price over the period. These results supported the first two research hypotheses (H1 and H2). More specifically, they indicated that book value and earnings were value relevant to investors on FTSE 250 during 2005-2012. This is consistent with the results from the literature regarding the UK (Paananen and Parmar, 2008; Iatridis, 2010; Gaston et al., 2010).
56
In investigating the changes in value relevance of accounting information produced by firms listed on FTSE 250 over 2005-2012, the results indicated that the adjusted R2 has significantly declined over the period. This suggests that value relevance of book value and earnings, together and individually, have declined over the period. This is contrary to the research expectation. In other words, the research hypotheses (H3 and H4) must be rejected in favor of a different opposite scenario.
Further investigations were conducted to clarify whether the results of that decline could be explained by the increase in investors’ reliance on information from non-financial sources. This explanation is claimed in the literature by researchers, such as Brown et al. (1999); Lev and Zarowin (1999); Alfaraih (2009). If this was the cause, the research expected a greater decline in the value relevance of accounting information regarding large firms and firms in the retail and consumer category because there is more information about those types of firm in constant circulation in the market. However, the related regression results found smaller decreases in both circumstances. Thus, it was deduced that other relevant factors had probably contributed to the decline, not just the dependence of investors on non-financial information (also called noise). For example, the decline in the level of compliance to regulations might be a plausible reason, as Alfaraih (2009) found a positive and significant relationship between the value relevance of accounting information and the level of compliance with IFRS.
Similar to the literature, both industry category and firm size were supposed as potential factors influencing the value relevance of book value and earnings. The results indicated that there were both industry-specific and firm-size differences in the valuation of book value and earnings. In other words, both hypotheses (H5 and H6) were accepted (also see appendix B). More specifically, value relevance of financial firms was higher than for the 57
other categories. Similarly, value relevance of accounting information was higher for smaller firms listed on FTSE 250 during 2005-2012, indicating that investors rely more on accounts in smaller firms rather than large firms. This might be explained by the reason that there is more news in the market about the larger firms.
5.2.
Major Contributions and Implication
This paper provides useful insights into the literature around the value relevance of accounting data in the UK after IFRS adoption. It also adds to the literature through its investigation of the changes in value relevance over the eight-year of post-IFRS period, which appears to be the longest test regarding this issue after IFRS adoption, particularly in the UK. A significant implication of these findings is an identifiable need for the LSE to take serious action on compliance issues with listed companies. Levels of compliance have been shown to positively correlate to the value relevance of accounting information (Alfaraih, 2009), so the observed decline in the value relevance of accounting information may well be due to the decline in the level of compliance.
58
5.3.
Limitations and Recommendations
5.3.1. Limitations Similar to any research, consideration should be given to certain limitations when interpreting the results. The limitations of this paper are outlined in four points:
1- The study period was limited to only eight years in examining the value relevance of information reported in the financial statements of firms listed on FTSE 250 in the UK. This is because of the adoption date of IFRS, which was 1st of January 2005, thus detailed, comparable financial statement have only been available for this 8 year period. 2- Due to the time limitation of this research, the study concentrated mainly on the listed firms on FTSE 250 in the UK. Consequently, it does not cover all the UK listed companies. 3- Because of the variation in the nature of economic, accounting and legal environment between the UK and some other countries, generalising the results of this paper to other stock markets should be done with some caution. For example, countries which operate a code law regime may well present significantly different results. 4- This study has only used the Ohlson’s price model to analyse and explain the variations in the value relevance of accounting information. However, the return model of Easton and Harris (1991), which investigates the relationship between stock returns and the levels and changes of earnings, might provide different explanations.
59
5.3.2. Recommendations for Future Research: The limitations of this paper may help with the identification of potential areas for future study:
1- Future studies could cover a longer period investigating the changes in the value relevance of accounting information after IFRS adoption in the same market, and considering whether the same pattern of decline can be observed over a longer timeframe. 2- Future research may include all the listed companies in the UK. Such results might provide sharper insights into patterns of value relevance of accounting information based on IFRS in the UK. 3- It would be interesting to research other countries that possess different economic, accounting and legal systems. The results could then be compared between them, which might give clear evidence regarding the long-run impact of IFRS on value relevance of accounting information of different countries. 4- Investigating this issue in the same market and over the same period, future research could employ the return model in addition to the price model. This is likely to verify whether any differences between the results of the two models, and if there were differences, produce valuable data as to the meaning and implications of this.
60
References: Aharony, J., Barniv, R. and Falk, H. (2010), The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU, European Accounting Review, 19(3), pp. 535–578. Alali, F. and Foote, P. (2012), The Value Relevance of International Financial Reporting Standards: Empirical Evidence in an Emerging Market, The International Journal of Accounting, 47, pp. 85–108. Alfaraih, M. (2009), Compliance with international financial reporting standards (IFRS) and the value relevance of accounting information in emerging stock markets: evidence from Kuwait, PhD thesis, Queensland University of Technology, Available at: http://eprints.qut.edu.au/36377/. Al-Hogail, A. (2004), The valuation effect of investor behavior on the relevance of financial information, PhD thesis, Case Western Reserve University, Ohio, United States. Amir, E., Harris, T. S., and Venuti, E. K. (1993), A comparison of the value-relevance of US versus non-US GAAP accounting measures using form 20-F reconciliations, Journal of Accounting Research, 31, pp. 230-264. Aubert, F., and Grudnitski, G. (2011), The impact and importance of mandatory adoption of International Financial Reporting Standards in Europe, Journal of international financial management and accounting, 22(1), pp. 1-26. Bae, K. and Jeong, S. (2007), The value-relevance of earnings and book value, ownership structure, and business group affiliation: Evidence from Korean business groups, Journal of Business Finance & Accounting, 34(5–6), pp. 740-766. Balachandran, S. V. and Mohanram, P. S. (2006), Conservatism and the Value Relevance of Accounting Information, Working Paper, Columbia University, Available at: http://www.krannert.purdue.edu/. Ball, R., Kothari, S. and Robin, A. (2000), The effect of international institutional factors on properties of accounting earnings, Journal of Accounting & Economics, 29(1), pp. 1-51. Ballas, A. and Hevas, D. L. (2005), Differences in the Valuation of Earnings and Book Value: Regulation Effects or Industry Effects? The International Journal of Accounting, 40(4), pp. 363–389. Barth, M., Beaver, W. and Landsman, W. (1992), The market valuation implications of net periodic pension cost components, Journal of Accounting & Economics, 15(1), pp. 27-62. Barth, M., Beaver, W. and Landsman, W. (1998), Relative valuation roles of equity book value and net income as a function of financial health, Journal of Accounting and Economics, 25(1), pp. 1–34. 61
Barth, M., Beaver, W. and Landsman, W. (2001), The relevance of the value relevance literature for financial accounting standard setting: Another view, Journal of Accounting & Economics, 31(1–3), pp. 77-104. Bartov, E., Goldberg, S. and Kim, M. (2005), Comparative Value Relevance among German, U.S. and International Accounting Standards: A German Stock Market Perspective, Journal of Accounting, Auditing and Finance, 20(2), pp. 95–119. Beaver, W. (2002), Perspectives on recent capital market research, The Accounting Review, 77(2), pp. 453-474. Bernard, V. (1995), The Feltham-Ohlson framework: Implications for empiricists, Contemporary Accounting Research, 11(2), pp. 733-747. Bhattacharjee, S. (2009), Problems of adoption and application of International Financial Reporting Standards (IFRS) in Bangladesh, International Journal of Business and Management, 4(12), pp. 165-175. Bloomberg L. P. (2013), Stock price; book value of equity; earnings per share; total assets and industry category of firms listed on FTSE 250. 2005 – 2012. Retrieved 02/07/2013. Brimble, M. and Hodgson, A. (2007), On the intertemporal value relevance of conventional financial accounting in Australia, Accounting and Finance, 47(4), pp. 599-622. Brown, S., Lo, K. and Lys, T. (1999), Use of R2 in accounting research: measuring changes in value relevance over the last four decades, Journal of Accounting and Economics, 28(2), pp. 83-115. Callao, S., Jarne, J. I. and Laínez, J. A. (2007), Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting, Journal of International Accounting, Auditing and Taxation, 16(2), pp. 148-178. Chalmers K., Clinch G. and Godfrey J. (2011), Changes in value relevance of accounting information upon IFRS adoption: Evidence from Australia, Australian Journal of Management, 36(2), pp. 151–173. Chang, J. J. (1999), The decline in value relevance of earnings and book values, PhD Thesis, Harvard University. Chua Y., Cheong C. and Gould G. (2012), The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia, Journal of international accounting research, 11(1), pp. 119–146. Clarkson, P., Hanna, J. D., Richardson G. and Thompson, R. (2011), The impact of IFRS adoption on the value relevance of book value and earnings, Journal of Contemporary Accounting & Economics, 7, pp. 1–17.
62
Collins, D. W., Maydew, E. L. and Weiss, I. S. (1997), Changes in the value-relevance of earnings and book values over the past forty years, Journal of accounting and economics, 24(1), 3967. Cormier, D. and Magnan, M. (2010), Financial reporting under IFRS is relevant for investors, but is it reliable and comparable? Capital Markets Magazine, pp. 48-50. Dahmash, F. and Qabajeh, M. (2012), Value Relevance of Ohlson Model with Jordanian Data, Interdisciplinary Journal of Contemporary Research in Business, 3(11), pp. 551-560. Damodaran, A. (2001), Applied corporate finance, Wiley. Daske, H., Hail, L., Leuz, C. and Verdi, R. S. (2008), Mandatory IFRS Reporting around the world: early evidence on the economic consequences, Journal of Accounting Research, 46(5), pp. 1085−1142. Devalle, A., Onali, E. and Magarini, R. (2010), Assessing the value relevance of accounting data after the introduction of IFRS in Europe, Journal of international financial management and accounting, 21(2), pp. 85-119. Easton, P. and Harris, T. (1991), Earnings As an Explanatory Variable for Returns, Journal of Accounting Research, 29(1), pp. 19-36. Elias N. (2012), Discussion of the impact of mandatory IFRS adoption on accounting quality: Evidence from Australia, Journal of International Accounting Research, 11(1), pp. 147154. Ely, K. and Waymire, G. (1999), Accounting standard-setting organizations and earnings relevance: longitudinal evidence from NYSE common stocks, 1927-93, Journal of accounting Research, 37(2), pp. 293-317. Epstein, B. J. and Jermakowicz, E. K. (2008), Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008, John Wiley & Sons Inc, US. Epstein, B. and Mirza, A. (2002), IAS 2002; interpretation and application of international accounting standards, John Wiley & Sons Inc, US. Fama, E. F. (1998), Market efficiency, long-term returns, and behavioral finance, Journal of financial economics, 49(3), pp. 283-306. Francis, J. and Schipper, K. (1999), Have financial statements lost their relevance? Journal of accounting Research, 37(2), pp. 319-352. Francis, J., LaFond, R., Olsson, P. and Schipper, K. (2004), Costs of equity and earnings attributes, The Accounting Review, 79(4), pp. 967–1010.
63
Gaston, S., Garcia, C., Jarne, J. and Gadea, J. (2010), IFRS adoption in Spain and the United Kingdom: Effects on accounting numbers and relevance, Advances in Accounting, incorporating Advances in International Accounting, 26, pp. 304–313. Gjerde, O., Knivsfla, K. and Sættem, F. (2005), The value-relevance of financial reporting on the Oslo Stock Exchange over the period 1964–2003, Discussion papers (23), Department of Finance and Management Science, Norwegian School of Economics and Business Administration. Graham, R., King, R. and Bailes, J. (2000), The value relevance of accounting information during a financial crisis: Thailand and the 1997 decline in the value of the baht, Journal of International Financial Management & Accounting, 11(2), pp. 84-107. Gujarati, D. (2003), Basic econometrics (3rd edition), New York: McGraw-Hill. Hellstrom, K. (2006), The value relevance of financial accounting information in a transition economy: The case of the Czech Republic, European Accounting Review, 15(3), pp. 325344. Hill, R., Griffiths, W. and Lim, G. (2008), Principles of econometrics (3rd edition), New York: John Wiley and Sons. Hillier, D. J., Ross, S. A., Westerfield, R. W., Jaffe, J. and Jordan, B. D. (2010), Corporate finance (1st European edition), McGraw-Hill. Holthausen, R. and Watts, R. (2001), The relevance of the value-relevance literature for financial accounting standard setting, Journal of Accounting & Economics, 31(1–3), pp. 3-75. Hope, O. K. (2003), Disclosure practices, enforcement of accounting standards, and analysts' forecast accuracy: an international study, Journal of Accounting Research, 41(2), pp. 235−272. Horton, J. and Serafeim, G. (2010), Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK, Review of Accounting Studies, 15(4), pp. 725751. Hung, M. and Subramanyam, K. R. (2007), Financial statements effects of adopting International Accounting Standards: the case of Germany, Review of Accounting Studies, 12(4), pp. 623−671. Iatridis, G. (2010), International financial reporting standards and the quality of financial statement information, International Review of Financial Analysis, 19, pp. 193–204. International Accounting Standards Board (2010), International Accounting Standards Board: Framework for the preparation and presentation of financial statements, Available at: http://www.iasplus.com.
64
Jermakowicz, E. K., Prather-Kinsey, J. and Wulf, I. (2007), The Value Relevance of Accounting Income Reported by DAX-30 German Companies, Journal of International Financial Management and Accounting, 18(3), pp. 151-191. Kargin, S. (2013), The Impact of IFRS on the Value Relevance of Accounting Information: Evidence from Turkish Firms, International Journal of Economics and Finance; 5(4), p.71. Khanagha, J. (2011), Value Relevance of Accounting Information in the United Arab Emirates, International Journal of Economics and Financial Issues, 1(2), pp. 33-45. Kontopoulos, G., Selim, G. and Tyrrall, D. (2010), The Value Relevance of Investor Oriented vs. Creditor Oriented Accounting Systems through the IFRS transition: Evidence from the UK, the Netherlands, Germany, and France, American Accounting Association. Kothari, S. and Zimmerman, J. (1995), Price and return models, Journal of Accounting and Economics, 20(2), pp. 155–192. Kousenidis, D., Ladas, A. and Negakis, C. (2010), Value Relevance of Accounting Information in the Pre-and Post-IFRS Accounting Periods, European Research Studies Journal, 13(1), pp. 143-152. Kouser, R. and Azzem, M. (2011), Relationship of share price with earnings and book value of equity: paramount impact of IFRS adoption in Pakistan, Economics and Finance Review, 1(8), pp. 84 – 92. La Porta, R., Lopez de Silanes, F. and Shleifer, A. (2006), What works in securities laws? The Journal of Finance, 61(1), pp. 1−32. Leuz, C., Nanda, D. and Wysocki, P. D. (2003), Earnings management and investor protection: an international comparison, Journal of Financial Economics, 69, pp. 505−527. Lev, B. and Zarowin, P. (1999), The boundaries of financial reporting and how to extend them, Journal of Accounting Research, 37(2), pp. 353-385. Manganaris P., Floropoulos J. and Smaragdi I. (2011), Conservatism and value relevance: Evidence from the European financial sector, American Journal of Economics and Business Administration, 3(2), pp. 254-264. Morais, A. I. and Curto, J. D. (2009), Mandatory Adoption of IASB Standards: Value Relevance and Country-Specific Factors, Australian Accounting Review, 19(2), pp. 128-143. Negakis, J. (2005), Accounting and capital markets research: A review, Managerial Finance, 31(2), 1-23. Ohlson, J. (1995), Earnings, book values, and dividends in equity valuation, Contemporary Accounting Research, 11(2), pp. 661-687.
65
Paananen, M. and Parmar, N. (2008), The Adoption of IFRS in the UK. Working paper, University of Hertfordshire, Available at: http://www.ssrn.com/. Pirie, S. and Smith, M. (2005), Relationships between Stock Prices and Accounting Information: A Review of the Residual Income and Ohlson Models, Working paper, Available at: https://www.ecu.edu.au/. Psaroulis, A. (2011), Did financial reporting quality improve after the adoption of IFRS in Greece? University of Piraeus, Thesis Project, Available at: http://digilib.lib.unipi.gr/dspace/bitstream/unipi/4705/1/Psaroulis.pdf. Punda, P. (2011), The impact of International Financial Reporting Standard (IFRS) adoption on key financial ratios–evidence from the UK, Aarhus School of Business, Thesis Project, Available at: http://pure.au.dk. Qu W., Fong M. and Oliver J. (2012), Does IFRS convergence improve quality of accounting information? Evidence from Chinese stock market, Corporate Ownership & Control, 9(4), pp. 187-196. Suadiye, G. (2012), Value Relevance of Book Value & Earnings under the Local GAAP and IFRS: Evidence from Turkey, Ege Academic Review, 12(3), pp. 301-310. Tsalavoutas, I. and Evans, L. (2010), Implementation of international financial reporting standards in the EU – Greek evidence of effects on financial statements, Managerial Auditing Journal, 25(8), pp. 814–842. Tsalavoutas, I., André, P. and Evans, L. (2009), Transition to IFRS and value relevance in a small but developed market: A look at Greek evidence, 32nd Annual Congress of the European Accounting Association. Tsalavoutas, I., André, P. and Evans, L. (2012), The transition to IFRS and the value relevance of financial statements in Greece, The British Accounting Review, 44, pp. 262-77. Vázquez, R. D., Valdés, A. L. and Herrera, H. V. (2007), Value relevance of the Ohlson model with Mexican data, Contaduría y administración, (223), pp. 33-52. Watts, R. L. (2003). Conservatism in accounting part I: Explanations and implications. Accounting horizons, 17(3), pp. 207-221.
66
Appendices:
Appendix A: Yearly Descriptive Statistics for Variables Used in the Valuation Model Stock Price per Share (P) Year
Book Value of Equity per Share (BVPS)
Earnings per Share (EPS)
N Median
Mean
Std. Dev.
Min.
Max.
Median
Mean
Std. Dev.
Min.
Max.
Median
Mean
Std. Dev.
Min.
Max.
2005
151
4.52
6.19
5.49
0.23
38.6
1.19
2.21
2.67
-1.13
16.14
0.19
0.27
0.38
-0.37
2.76
2006
195
5.09
6.68
6.11
0.31
48.35
1.32
2.16
2.82
-1.15
23.55
0.26
0.4
0.47
-0.33
3
2007
198
4
5.6
5.61
0.21
45.18
1.56
2.71
4.77
-0.94
54.34
0.32
0.52
0.87
-0.83
9.79
2008
194
2.3
3.46
3.93
0.16
34.5
1.57
2.67
4.43
-0.68
50.97
0.26
0.3
0.86
-4.74
5.59
2009
196
3.23
4.33
4.08
0.29
33.11
1.3
1.92
1.92
-1.29
9.87
0.15
0.12
0.48
-2.14
1.94
2010
190
3.45
4.84
4.53
0.13
26.35
1.46
2.39
4.04
-0.08
49.19
0.22
0.35
0.53
-0.6
3.87
2011
194
3.46
4.92
4.6
0.19
30.15
1.81
2.7
4.24
-0.05
51.53
0.25
0.37
0.48
-0.6
3.02
2012
198
3.91
5.79
5.68
0.34
36.5
1.71
2.8
4.54
-0.1
54.24
0.25
0.35
0.53
-1.27
3.66
Pooled 1516
3.62
5.2
5.13
0.13
48.35
1.48
2.45
3.84
-1.29
54.34
0.24
0.34
0.61
-4.74
9.79
67
Appendix B: Research Questions, Research Hypotheses and Test Results Research Question
Was accounting information, book value and earnings, value relevant to participants in the 1 UK after IFRS adoption between 2005 and 2012?
Did the value relevance of book value and 2 earnings change over that period (20052012)?
3
Did factors like firm size and industry category have any impact on the value relevance of book value and earnings over the period?
Hypotheses
Results
H1: Book value of companies listed on the FTSE 250 were value relevant to participants after IFRS adoption during the period 2005-2012.
Accepted
H2: Earnings of companies listed on the FTSE 250 were value relevant to participants after IFRS adoption during the period 2005-2012.
Accepted
H3: The value relevance of the book value of companies listed on the FTSE 250 enhanced over the 2005-2012 period.
Rejected
H4: The value relevance of the earnings of companies listed on the FTSE 250 enhanced over the 2005-2012 period.
Rejected
H5: There are industry-specific differences in the valuation of book value and earnings.
Accepted
H6: There are firm-size differences in the valuation of book value and earnings.
Accepted
68
