The Influence of Economic Factors on the Value Relevance of Accounting Information in Jordan

Abstract

The paper examines the influence of economic factors namely foreign ownership and trading volume on the value relevance of earnings, book value and cash flows relative to three share price proxies namely average annual share price, annual closing share price and share price after a three-month period following the financial year-end (hereafter ATM-share price), after controlling company's size and leverage for Jordanian services and industrial companies within the period [2004][2005][2006][2007][2008][2009]. Since the paper is the first, as the researcher believes, that examines the influence of foreign ownership and trading volume on the value relevance of earnings, book value and cash flows in an emerging exchange, it aims to provide evidence regarding the influence of these factors on the value relevance of accounting information. The paper found that the value relevance of earnings and book value is greater for companies having foreign ownership and larger trading volume. With the effect of these factors, closing share price shows more response than the other share price proxies. The findings suggest that market participants might be able to extract the firm value via these economic factors. The paper extends the valuation model by including cash flows together with earnings and book value. The findings demonstrate that there is a shift away from earnings towards book value as the basis of firm valuation.

Industry type and accounting numbers relevance The case of Jordan

“…As company's size plays an important role regarding accounting numbers availability and companies are considered to be highly leveraged when they are financed via debts, companies size and leverage have to be controlled when investigating the relevance of their accounting numbers. Following Shamki (2013) and Shamki and Abdul Rahman (2013) we measure companies size by the logarithm of total assets and their leverage by debt to total assets ratio. Industry type with three accounting variables namely earnings, book value of equity and operating cash flows are linked to three different measures for security price after controlling company's size and leverage and diagramed as our framework in Figure 1.…”

“…The price valuation models are used to regress security price on accounting numbers in value relevance literature (Ely and Waymire, 1999;Francis and Schipper, 1999;Shamki and Abdul Rahman, 2013). As done by previous value relevance studies, this study examined (1) how accounting variables affect security price, (2) how accounting numbers are significantly related to security price or (3) how much the variance in security price can be explained by the selected accounting numbers to indicate the value relevance of those numbers (Ely and Waymire, 1999;Francis and Schipper, 1999;Bao and Bao, 2001;Vardavaki and Mylonakis, 2007;Dastgir and Velashani, 2008;Gee-Jung, 2009;Shamki and Abdul Rahman, 2011;Shamki, 2013;Shamki and Abdul Rahman, 2013). The significant level of individual coefficient of price regression model can address the first and second questions, while by having a look at betas values, one can immediately notice which accounting numbers explains more the variation in the security price.…”

“…Since there are limited studies that examined the impact of industry type on the accounting numbers relevance, a weak comparison could be made and needs to be more supported by future research. Following Abayadeera (2010); Shamki (2013) and Shamki and Abdul Rahman (2013) the paper depends on its regression models outcomes for the pooled sample in evaluating its hypotheses.…”

Company's Characteristics and Accounting Information Relevance

“…In the Middle Eastern region and on the contrary to developed countries, there are limited practical research on the effect of different non-accounting information on the accounting information relevance have been found in Jordan [30]. On the value relevance of accounting information, those studies examined the effect of mandated accounting disclosure, legal environment, source of accounting standards and liberalization [7], forging and local stockholders number [29], foreign ownership and trading volume [30], financial disclosure level and time [31] and industry type [32]. This study extends the valuation research in Jordan to include the effect of stockholders number, listing status and company's age on the value relevance of companies' accounting information.…”

Does Book Values and Earnings Affect Equity Values of Corporate Entities in Nigeria?

“…While studies have proved the existence of a significant link between equity values and the information shown in annual accounts of entities (with emphasis on book values and earnings), though at varying degrees (Takacs, 2012;Pathirawasam, 2013;Shamki, 2013), studies have also argued that such information have either lost, or is experiencing a wane in its relevance. Based on the aforesaid, this study focused on uncovering the effect which book values and earnings may have on equity values, using quoted corporate entities in Nigeria.…”