Download Value relevance of accounting information and share price: A study

Merit Research Journal of Business and Management Vol. 2(1) pp. 001-006, January, 2014
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Full Length Research Paper
Value relevance of accounting information and share
price: A study of listed manufacturing companies in Sri
Lanka
Vijitha P. and *Nimalathasan B.
Abstract
Department of Accounting,
Faculty of Management Studies and
Commerce,
University of Jaffna,
Jaffna, Sri Lanka.
*Corresponding Author’s E-mail:
[email protected]/
[email protected]
Tel: +94-777-238-282(Mobile)/ +9421222-7519 (office)
The purpose of this research is to provide empirical evidence concerning
value relevance of accounting information such as Earning per Share (EPS),
Net Assets Value Per Share (NAVPS), and Return On Equity (ROE) and Price
Earnings Ratio (P/R) to Share Prices (SP) of manufacturing companies in
Colombo Stock Exchange (CSE). Quantitative approaches were used in this
study. For conducting this research, data were collected from secondary
sources mainly from financial report of the selected companies, which were
published by CSE in Sri Lanka. Findings of this research revealed that the
value relevance of accounting information has the significant impact on
share price and value relevance of accounting information is significantly
correlated with share price.
Keywords: Value Relevance of Accounting Information, Share Price and
Colombo Stock Exchange (CSE).
INTRODUCTION
In recent times, the value relevance of financial
information has been increasingly concerned by the
researchers (Hellstron, 2005). Value relevance is one of
the basic attribute of quality of the financial statements.
The concept of the value relevance of accounting
information is defined as ‘‘the ability of accounting
numbers to summarize the information underlying the
stock prices, thus the value relevance is indicated by a
statistical association between financial information and
prices or returns’’(Jianwei and Chunjiao, 2007).
Listed companies use financial statements as one of
the major medium of communication with their
stakeholders. Therefore, stock market regulators and
accounting standards setters trying to improve the quality
of financial statements in order to increase the
transparency level in financial reporting (Vishnani and
Shah, 2008). Financial Statements will consist of different
type of information such as Financial Information or
Accounting Information and Non Financial Information or
Non Accounting Information. Accounting Information is
information which describes an account for a utility. It
processes financial transactions to provide external
reporting to outside parties such as to stockholders,
investors, creditors, and government agencies etc. Non
accounting information is information which cannot be
measured in monetary terms to make investment
decisions by the investors (Cited by Perera and
Thrikawala, 2010).
For financial reporting to be effective, accounting
information should be completed as relevant and reliable
(Hendricks, 1976). The primary purpose of the financial
statements is to provide information about a company in
order to make better decisions for users particularly the
investors (Germon and Meek, 2001). It should also
increase the knowledge of the users and give a decision
maker the capacity to predict future actions. Therefore,
002 Merit Res. J. Bus. Manag.
relevance accounting information can be described as an
essential pre requisite for stock market growth.
(Oyerinde, 2009)
According to the previous studies many researchers
have conducted to identify relationship between market
price per share as the dependent variable and a set of
independent variables such as NAVPS and EPS. This
study investigates the value relevance of accounting data
in the listed manufacturing companies under the
Colombo Stock Exchange (CSE) over a period of 5 years
from 2008 to 2012.
Statement of the problem
The purposes of accounting information are to provide
information about a business’s assets, liabilities, equity,
revenues, income, expenses, profits and losses, cash
flows. It assists users predict future performance of a
business. This study investigates the relative value
relevance of the financial information of the companies
listed in Colombo Stock Exchange. In any country,
increase of investment in capital market leads to improve
strength of the capital market and development of
economy.
Investors rely on accounting information in their pricing
of shares and companies which provide good quality
information have thus an advantage in a lower cost of
capital. Investors in developed counties are keen on the
financial information of the intended investing companies.
So that the investigation of the value relevance on
financial information with relevant to the stock prices is
important matter for the developing countries like Sri
Lanka.
Objectives of the study
Main objective of the study is to examine the impact of
value relevance of accounting information on share price.
To achieve the main objective, the following sub
objectives are considered.
• Identify the variables of value relevance of accounting
information.
• Find out the relationship between value relevance of
accounting information and share price.
• Suggest some measures to enhance the result.
Review of literature
A different scenario is found in the study on CSE taking 6
commercial banks from 2005-2009. It indicates Return
on equity (ROE) is significantly related with the share
price (Perrera et al, 2010). According to their conducted
research to examine the relevance of accounting
Information on investors’ decisions among the
commercial banks registered under the CSE, it is found
that EPS, Earning Yield and ROE has not declined its
value relevance. Further it explained that investors react
according to the aggregate of accounting information
which published in financial statements. Accounting
information has the ability to explain the share prices of
the banking sector which registered in the CSE in Sri
Lanka.
Another study has also been conducted in Sri Lanka
among 100 companies listed in CSE representing all the
industry sectors except Banking Finance and Insurance
sector. Karunarathne and Rajapakse have studied an
empirical research to determine the value relevance of
financial statements’ information and used Return model
as well as Price model. It revealed that the value
relevance of accounting information under the Price
model has more explanatory power than Return Model.
In an analysis of Dhaka Stock Exchange (DSE)
consisting of 105 companies from 2000 to 2010 it is
found that negative relationship exist between changes in
NAVPS and changes in share price (Miah, 2012).
Sharma (2011) has undertaken a research to examine
the empirical relationship between equity share prices
and explanatory variables such as: book value per share,
dividend per share, EPS, price earnings ratio, dividend
yield, dividend payout, size in terms of sale in Indian
Market. According to that EPS, dividend per share and
book value per share has significant impact on the
market price of share. Further, results indicated that
dividend per share and EPS being the strongest
determinants of market price.
Kumar and Hundal (1986) examined the impact of
dividend per share, earning per share net asset value per
share, leverage ratio on market price of share by using
the linear regression model between India and Selected
Asian Markets. But they found dividend policy was the
more sensitive factors in affecting share price. However,
the relationship is also affected by the following:
persistence of earnings, positive earnings or negative
earnings, frequency of reporting and efficiency of market.
Pourheydari, Aflatooni and Nikbakhat (2008)
compared the value relevance of book value and
dividends versus book value and reported earnings in the
TSE from 1996 to the end of 2004.The results of their
research indicated that there was a positive relationship
between dividends, book value and earning, with stock
market value in the TSE. Safahjo, Pourhyidari and
Solaimani (2005) examined the empirical relationship
between EPS and book value with stock market value for
the 8-year period from 1997 to 2002. They found that
there was a significant relationship between EPS, BV and
price.
Andriantomo and Yudianti (2013) have conducted a
research concerning value relevance of earnings and
book values to stock prices in Indonesia Stock Exchange
(ISE). According to that the results indicate that earnings
and book values simultaneously are relevant informa-
Vijitha and Nimalathasan 003
EPS
P/E
Accounting
Information
ROE
Share price
NAVPS
Figure 1. Conceptual model
tion in explaining stock prices.
Oyerinde (2009) investigated the value relevance of
accounting data to determine if there is a relationship
between accounting numbers and share prices among
top 30 companies in the Nigerian Stock Market (NSM)
over the year 2001 to 2004. He explained the correlation
between accounting information such as EPS, ROE,
Earning Yield (EY) and Market Price per Share (MPS).
Germon et al, 2000 conducted another analysis of NSM
consisting top 30 companies from 2001 to 2004. They
found that the relationship between share price and EPS
is high but the ROE is very low.
Svenson and Larsson (2009) studied a research to
examine the value relevance of earning in Sweden.
Earnings and market values from 30 companies and over
10 years from 1999 to 2008 were collected for this study.
According to their research it is found that earnings are
value relevance and earnings can explain 9.3 percent of
the market return in Sweden.
Abayadeera (2010) tested for the value relevance of
financial and non-financial information in high-tech
industries in Australia with a sample size of 91
companies running through various sectors of the
Australian economy. His studies showed that value
relevance declined in earnings but increase in book
value. He also found out in his study, with overall
evidence, that the book value is the most significant
factor and earnings are the least significant factor in
deciding share prices in high-tech industries in Australia.
This study further supports other studies showed value
relevance declined in book value but increase in
earnings.
The Ohlson’s (1995) Equity Valuation was explicitly
applied to examine the value relevance of financial and
nonfinancial information with an overall result that
provided evidence that book value is the most significant
factor and earnings are the least significant factor in
deciding share prices in high-tech industries in Australia.
From the above literatures, we can see the research
related to this study has been conducted in Sri Lanka
among six commercials banks and 100 companies in
CSE. But, the research on manufacturing companies in
CSE has not been investigated. Hence, this present
study fulfils the research gap.
RQ1: What are the variables of value relevance of
accounting information?
RQ2: What relationship exists between value relevance
of accounting information and share price?
RQ3: Does Value relevance of accounting information
have the impact on share price?
Conceptual framework
From the literature, the conceptual model has been
developed by the researcher to carry out the research.
(Figure 1)
Hypotheses
Possible hypothesis are formulated based on
conceptualization of research problem in order to achieve
the research objective.
H1: Value relevance of accounting information has the
significant impact on share price.
H2: Value relevance of accounting information
significantly correlated with share price.
RESEARCH METHODOLOGY
Sampling Design
The manufacturing companies registered under the CSE
are considered as the area of this study. Among them, 20
004 Merit Res. J. Bus. Manag.
Table 1. Descriptive Statistics of the Accounting Information
N
Minimum
Maximum
Mean
Std. Deviation
EPS
20
-1.21
16.51
5.1175
5.38040
NAVPS
20
1.38
202.52
45.9945
49.59659
ROE
20
-48.21
64.40
8.6955
20.94653
P/E
20
.00
47.51
16.3880
11.63119
Market Price Per Share
20
2.76
153.05
63.1145
45.83385
Valid N (list wise)
20
Table 2. Co-linearity Statistics
EPS
EPS
Pearson Correlation
1
.528
Sig. (2-tailed)
N
NAVPS
ROE
Sig. (2-tailed)
.017
Price
20
**
*
ROE
.611
**
P/E
Market Price Per Share
-.383
.908
**
.017
.004
.096
.000
20
20
20
20
1
.079
-.423
.635
**
.740
.063
.003
20
20
20
20
.079
1
-.286
.583
.222
.007
**
Pearson Correlation
.611
Sig. (2-tailed)
.004
.740
20
20
20
20
20
Pearson Correlation
-.383
-.423
-.286
1
-.444
Sig. (2-tailed)
.096
.063
.222
N
Market
Share
*
.528
N
P/E
20
Pearson Correlation
N
NAVPS
Per Pearson Correlation
Sig. (2-tailed)
N
20
.908
20
**
.635
20
**
.583
.050
20
**
*
-.444
.000
.003
.007
.050
20
20
20
20
20
*
1
20
**Correlation is significant at the 0.01 level (2-tailed).
*Correlation is significant at the 0.05 level (2-tailed).
companies were selected for this study as per
convenience. These data consisted of 5 years period
from 2008 to 2012.
companies under the CSE is reliable and validity since
these reports is audited.
Data presentation and analysis
Data sources
This study requires secondary which is collected from
accounting books, studies and researches which are
written by many authors in different areas such as in the
world as well as within country and financial statement of
the particular companies.
Reliability of the scales and validity of the data
Financial statement which is published by the registered
According to the Table 1 it can be seen that descriptive
statistics of the accounting information of manufacturing
companies which comprise minimum, maximum, mean
and Standard Deviation. Highest value of standard
deviation of accounting information is perceived in
NAVPS and lowest standard deviation is recorded in
EPS. EPS and ROE indicate the negative minimum
value. As per the constructed value, highest average
value of accounting information is indicated by the Market
price per share and average value of EPS and ROE is
very low.
Vijitha and Nimalathasan 005
Table 3. Model Summary
Model
1
R
.933
R Square
Adjusted R Square
Std. Error of the Estimate
.871
.837
18.52299
a
a. Predictors: (Constant), Price Earnings Ratio, Return on Equity, Net Assets Value Per
Share, Earning Per Share
b. Dependent Variable: Market Price Per Share
Table 4. ANOVAb
Model
1
Regression
Residual
Total
Sum of Squares
df
Mean Square
F
Sig.
34767.568
5146.520
39914.088
4
15
19
8691.892
343.101
25.333
.000
a
a. Predictors: (Constant), Price Earnings Ratio, Return on Equity, Net Assets Value Per
Share, Earning Per Share
b. Dependent Variable: Market Price Per Share
Table 5. Coefficients table in the Regression analysis
Unstandardized Coefficients
B
Std. Error
Model
1
(Constant)
EPS
NAVPS
ROE
P/E
22.984
5.753
.231
.305
-.158
11.136
1.256
.115
.280
.420
Standardized
Coefficients
Beta
t
Sig.
.675
.250
.140
-.040
2.064
4.579
2.015
1.090
-.377
.057
.000
.062
.293
.712
a. Dependent Variable: Market Price Per Share
Correlations analysis
Regressions analysis
Table 2 clearly describes the relationship for all the pairs
of variables. From the output, it can be found that, the
correlation coefficient between EPS and share price is
0.908 which is significance at 1% level. Based on that
conclusion can be made that there is a strong
positive correlation between EPS and share price at 1%
significance
level.
The
correlation
coefficient
between NAVPS and share price is 0.635 which is
significance at 1% level. It indicated that there is a
strong positive correlation between NAVPS and share
price at 1%. The correlation coefficient between ROE and
share price is 0.583 which is significance at 1% level. It
can be concluded that there is a strong of
positive correlation between ROE and share price at 1%
level.
But the correlation coefficient between P/E and share
price is -0.444 which is significance at 5% level. There is
a week negative relationship between P/E and share
price.
The table 3, Model summary shows the impact of
independent variable and dependent variable. According
to that Adjusted R square is 0.837. It means that there is
83.7 % of the impact of the independent variable on the
dependent variable. It indicates that value relevance of
accounting information has 83.7% impact on share price.
From the table 4, it can be found that the accounting
information has the significant impact on share price at
1% significance level.
Table 5 illustrates the coefficient value of regression
analysis. It clearly shows what extent each independent
variable impact on share price. Based on that, the p value
for beta coefficient of EPS is 0.000 which is significance
at 1% level. It means the EPS significantly impact on
share price. At the same time, the p value for beta
coefficient of NAVPS is 0.062 which is significant at 10%
level. But the p value for beta coefficient of ROE and P/E
ratio are 0.293 and 0.712 respectively which are not
significance. Therefore it can be concluded that except
006 Merit Res. J. Bus. Manag.
EPS and NAVPS other independent variable such as
ROE and P/E ratio does not have significant impact on
share price.
From the table 5, the regression model can be
retrieved as follows.
Sp = βo + β1 EPS + β2 NAVPS + β3ROE + β4 P/E + e
Sp = 22.984X0 + 5.753(EPS) + 0.231(NAVPS) + 0.305
(ROE) + (-0.158) (P/E) + e
CONCLUSION
The present study has been undertaken to examine the
empirical relationship between share prices and
explanatory variables such as NAVPS, EPS, P/E, ROE,
for the period 2007-2011. The result revealed that the
accounting information such as EPS, NAVPS, and ROE
were significantly correlated with share price at 1%
significance level and also has strong positive correlation.
The P/E ratio was also negatively correlated with share
price at 5% significance level. From the regression
analysis it can be concluded that value relevance of
accounting information has the significant impact on
share price at 1% significance level. At the same time
EPS and NAVPS also have the significant impact on
share price at 1% and 10% significance level respectively
other than ROE and P/E ratio.
Finally, the conclusion can be made that value
relevance of accounting information has the significant
impact on share price and value relevance of accounting
information is significantly correlated with share price.
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