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International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
International Accounting Standards and
Value Relevance of Book value and
Earnings: Panel study from Pakistan
Muhammad Azeem
BS. (Acc & Fin) Scholar
Department of Commerce
Bahauddin Zakariya University, Multan-Pakistan
Rehana Kouser
(PhD Scholar)
Department of Commerce
Bahauddin Zakariya University, Multan-Pakistan
ABSTRACT
Study targets to check the impacts of International Accounting Standards (IASs)
on the value relevance of accounting information, specifically, Book value
(BVPS) and Earnings (EPS).Value relevance, the ability of accounting
information to explain changes in the share prices (usefulness in stock valuation),
is assumed to be affected by change in accounting standards, as evident in
literature. Worldwide increasing importance and adoption of IAS/IFRSs by the
EU and other counties in world, in 2005, caused the re-notification for adoption of
IASs in Pakistan. Impacts of this adoption (mandatory) are observed on fifty two
(52) largest (by market capitalization) non-financial, public limited companies
listed on Karachi Stock Exchange by conducting the regression analysis. Analysis
is based on total of eight years financial data (2002-09). Results of statistical
analyses show that adoption of IASs improved the value relevance of book value
and earnings. The financial information provided in annual report is more relevant
in making investment decisions after the adoption of IASs in 2005. Country
related factors are seemed to be less affective in case of Pakistan and value
relevance is higher than find in research studies, conducted in other parts of the
world with similar context.
Keywords: International Accounting Standards (IASs), Value Relevance, Stock
Valuation, Book Value, Earnings, EU, BVPS, EPS, Market Capitalization
JEL classification codes: G11, G14, G15
INTRODUCTION
Today’s investors have to make investment decisions based on opportunities arising worldwide.
Integration of capital markets globally made the uniform accounting framework’s need crucial. This is
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Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
difficult and expensive task for an investor to make well-informed investment decisions based on
different reporting skeleton. The need of worldwide comparable accounting and reporting standards is
generated as a result of globalized financial markets (Zarzeski, 1996). On the other hand, it is also
difficult and expensive for the companies to generate finances from diversified regions by presenting the
financial information in multiple reporting formats due to higher transaction cost. The rapid growth of the
financial markets has a big concern to the success of multinational businesses. Changing investor
behavior, along with the other factors, participated to the internationalization of economic activities.
Uniformity of accounting standards is also critical in the value relevancy area because they are important
determinants of financial reporting quality. Proponents of internationalized financial reporting standards
argue that such diversity reduce the quality and the relevance of accounting information as quoted by
Purvis et al. (1991), if all firms follow the same paradigm of accounting and reporting standards external
financial reports of firms will offer improved uniform disclosures and more useful accounting information
for decision making to investors.
Research article is divided into six parts. After providing the background in first section “Introduction”,
second part “Major Issues in Financial Reporting: Globalization Perspective” discusses the purpose of
financial reports, role of accounting standards and affects of globalization on reporting practices. It also
includes the emergence and importance of IASs and IFRSs. Value Relevance is explained in the section.
It explains the meanings, and types of methods to gauge value relevance. Intervening factors like Market
Efficiency and accounting quality are also discussed. Third Section is “Financial Reporting System of
Pakistan”. Section four includes the literature reviewed. Fifth section discusses research methods used in
the study. Six and last part contains the “Empirical Findings and Conclusion”.
MAJOR ISSUES IN FINANCIAL REPORTING: GLOBALIZATION PERSPECTIVE
Financial Reporting is only the process of delivering financial information through the financial reports.
These financial reports are called annual reports. Annual reports include the financial statements,
disclosures to the financial statements, accounting framework by use of which accounting statements are
prepared, and necessary information related to the shareholders. Reporting may be on quarterly basis,
semi annually or annually. Normally reports are issued annually, however it depends on the rules and
legal bindings for corporate sector of country. It also varies with type of company either public limited, or
private limited.
Basically financial reporting is important for public limited companies. Public limited companies are
those companies which involve the interest of large public. Public limited companies have a lot of shares
issued purchased by general public. These shares are traded on the floor of stock exchanges in the
country. Public limited companies (PLCs) have the advantage that they can gather a large pool of funds.
But the problem here faced by the company is to keep the prices of its share high and stable so that it can
attract prospective investors. Financial information is issued through the annual reports. Investors then
analyses the information and try to estimate expected share price of the company. Original share price is
determined by the market forces as per its characteristics. However it is possible to determine share price
using some stock valuation models and statistical technique.
Significance of Accounting Standards
For each profession, there is always a paradigm. Financial reporting also has its own frameworks. It has
accounting principles, policies and conventions, that are used everywhere and are integral parts of
accounting and financial reporting. They are famous with the term of accounting standards.
However there is also a space for choices in accounting practices. For guidance on these practices every
country has its set of accounting rules, these rules are called Generally Accepted Accounting Policies
(GAAP). Other requirements are posed normally by the controlling bodies of accounting, stock exchanges
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Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
and requirements held by company’s law. So for quality financial reporting company must abide by these
requirements and follow relevant reporting skeleton. At the end company must take a certificate from the
certified accountant that it has followed all the accounting policies, rules and fulfilled related
requirements. This certificate is known as the auditor’s report. It is considered as the evidence of good
financial reporting.
Globalization and Diverse Financial Reporting Practices
Globalization is very important factor to affect the financial reporting practices. It is the integration of
world to solve the problem of scare resources. Like many others, firms (PLCs) too have the opportunity
now to get capital from international markets. They can sale their share to international investors for
capital accumulation. No doubt globalization supplies many opportunities to the PLCs but it gives certain
challenges also. The leading advantage of that it provides bigger markets which result bigger profits and
ultimately leads to greater wealth for further investment, development and reducing poverty in many
countries.
In order to ensure smooth functioning of capital markets, the availability of reliable, clear and comparable
financial information is essential. After globalization, there is a dire need for comparable standards of
financial reporting which has become dominant due to the development in number, reach and size of
multinational companies, foreign investments, cross-border purchase and sale of securities. But due to the
social, cultural, legal and economic variances among countries, International accounting standards and
their practices differ extensively. This is the reason the integrity of financial reports becomes doubtful
because the same transactions are accounted and recorded differently in different countries and if we want
to avail the opportunities created by globalization, there must be some common or integrated set of
accounting rules which may be accepted worldwide.
Increasing trend of investing and borrowings in foreign countries and globalization of businesses and
services required the harmonization of accounting standards. Further need can be clarified with following
benefits of harmonization:
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Harmonization make certain about high quality of financial information disclosed in financial
statements and trustworthiness of information.
It plays a vital role in economic and financial development of country in some cases.
Multinational companies having subsidiaries in different countries can be compared and
evaluated in term of their performances.
Meaningful results of performance can be taken for decision making.
Harmonization creates international credibility of corporation.
Harmonization of accounting standards is a foundation for analyzing international capital
markets which may, in result, lessen the cost of capital and therefore the performance of
company can be improved.
It gives a place where no country can get the advantage or disadvantage of its GAAP.
Emergence and Importance of IAS/IFRSs
After catering the problem of comparability and understandability, results were integrated accounting and
financial reporting standards. These efforts started with the establishment of IASC (International
Accounting Standards Committee) in 1973. The broad objective of the IASC was harmonization of
accounting practices through by the h the formulation of accounting standards and to promote their
worldwide acceptance.
The term IFRS abbreviated for International Financial Reporting Standards is used for the combination of
International Accounting Standards and Financial Reporting Standards. These are the integrated set of
accounting standards which are adopted all over the world the world. IFRSs are issued by the IASB.
However former IASs were issued by the IASC the previous structure of IASB.
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Vol: 2, No: 9.September, 2011 ISSN 2156-7506
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The new structure of IASC was accepted by its membership and it was declared as an autonomous body
that has trustees and the board. Board members are appointed by the trustees and exercise oversight and
increase funds needed but the major responsibility of the board is to set the accounting standards. And this
new structure has started its work from January 1, 2001 which is now known as IASB (International
Accounting Standards Board). IASB’s major job is to create harmonization which give lots of benefits to
the investor analysts because it leads towards the similarities and reduce differences in financial
statements and this make its comparability feature possible. In this the one report of multinational
companies can be used anywhere and they can save their lot of time and efforts which they have spent for
making different reports for different countries. Role of stock exchanges as the capital markets is also
improved with this harmonization of accounting and reporting standards around the globe. Increasing
number of firms listed on the local stock exchanges needs investor protection rules and policies.
Another milestone in the integration of capital markets is the establishment of IOSCO (International
Organization of Securities Commissions) in mid-2000. This organization like a local securities exchange
commission regulates the stock exchanges all over the world. It can be regarded an international regulator
of stock exchanges in world as IASB is international body of accounting standards.
Harmonization does not finished in itself but it is way to reach toward certain laudable policy goal. The
main two benefits were may get from harmonization of accounting standards, first is performance
excellence achieved through low transition cost. The other is well known, discussed, and so much needed
due to globalization of firms, that is comparability factor for investors, they will be in case to compare the
results if they are shareholder of multinational company or associated with parent company which have
subsidiary in other country. It will reduce the transaction cost, as some Canadian companies prepare new
financial statements in accordance to U.S GAAP also because they have subsidiaries there also, so for
government, stock markets and standard setting bodies’ investors and all stakeholders will get relief in
harmonization of accounting standards around the world.
Value Relevance of Accounting Information
Value relevance is the ability of financial information to predict share prices. While using the
fundamental analysis, it requires that the data used must have some explanatory power. This explanatory
power to predict market value is defined as value relevance. The term value relevance is used now a days
widely, for financial reporting standards, accounting variables, spending on intangibles etc. The issue of
value relevancy is very old in the literature of accounting and financial reporting. In early 90s the notion
was raised that information being reported by companies is becoming less relevant for investors. There
are many models developed by scholars to determine the value relevancy. R-squared is most traditional
tool to check the relevance of an accounting variable to the market price of shares. This value relevance is
measured in many ways; however there are three major types. This classification is used by many e.g.,
Lambert (1996) and Holthausen and Watts (2001).
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Relative association
Incremental association
Marginal information content
Relative association studies find the value relevance in two different accounting paradigms. Usually
higher R-squared is categorized as more value relevant.
Second type is the use of a set of some financial numbers in the regression analysis to predict share prices
and than if regression coefficient is significantly different than zero, it is assumed that these variables are
value relevant.
Third Marginal information content technique finds that how much increase in information available to
the investors comes by adding another accounting measure.
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FINANCIAL REPORTING STRUCTURE IN PAKISTAN
Accounting has very old roots in the sub-continent. Gladwin (1796) shown that, in 1583 there was a
Hindu method of accounting before the adoption of Persian mode in Indo Pak. Hamilton’s (1798) argues
that Hindu method of accounting used by Bengali traders was a double entry system. After the emergence
of Pakistan in 1952 as a first walk toward the institutional development of the accounting profession, the
practicing accountants back then called registered accountants formed a private body known as the
Pakistan Institute of Accountants (PIA). In Pakistan parts of the reporting system are stock exchanges,
professional bodies for accounting, corporate law, and accounting standards framework. We explained all
of these parts step by step.
On emergence of Pakistan in 1947, it received a falling down economy made of a prevalence of
agriculture, disordered transport system, huge immigrant troubles, deprived industrial legacy,
undeveloped banking and financial system, and negligible electricity. In view of its unstable economic
conditions, the country was said to be “Economic wreck” and troubles and darkness was expected for
newly formed state. But Pakistan did survive at this stage and goes for economic development way by
working hard by its nation. In June 1959, the accountancy departments were formed to deal with the
profession of accounting in ministry of commerce instead of section officer. Consultative council was
established known as ‘council of accountancy” under auditor’s certificates rules 1950 as well this period
and suggested the formation of ICAP later in Pakistan.
Major institutions developed by the government of Pakistan and those established at the international
level affected the patterns of financial reporting in Pakistan. In Pakistan bodies which regulated the
accounting and reporting practices are following:
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ICAP (Institute of Chartered Accountants Pakistan)
SECP (Securities and Exchange Commission of Pakistan)
Karachi Stock Exchange, Islamabad Stock Exchange, and Lahore Stock Exchange
State Bank of Pakistan
Companies Ordinance 1984
Code of Corporate Governance
In Pakistan the concept of accounting and reporting rules started with the emergence of ICAP, as it was
the only body to regulate accounting in the country. In the absence of any standards and defined rules,
ICAP issued its ATRs which are used for financial reporting as GAAP till now. ICAP council issued
some ATRs (Technical Releases) on some specific issues for defined financial reporting practices. ICAP
had its circulars regarding all proceedings made by it, and these ATRs are also issued with reference of
these circulars. These circulars along with these ATRs worked as the interpretations of the accounting
practices. There are thirty one TRs in total. Nineteen of them have been withdrawn. Rest twelve is
effective till now. These TRs are complement to the accounting and reporting standards being followed
with the passage of time.
IASs in Pakistan: Adoption Paradox
There is the contradiction on the issue of adoption of international accounting standards IAS). Pakistan
(ICAP) became the member of the IASC in 1974 it started to recommend the IASs issued by the IASC
from 1986. This was the first time adoption of accounting standards. But this adoption was casual one due
to following reasons:
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Only some of the companies adopted them at that time
Changes were made in these standards by ICAP required for local situation and needs
Interpretation and many time explanations were issued for these standards for the
understandability
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Vol: 2, No: 9.September, 2011 ISSN 2156-7506
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We termed this adoption of IASs as the voluntary adoption as it occurred in other countries of world too.
But with the increased popularity, need and adoption by super powers, in 2005, EU issued the notification
for the adoption of IFRS (new set issued continued after IASs), Pakistan (SECP) also issued a SRO
665(1)/2005 to re-notify the adoption of IASs adopted.
The term adoption is very much difficult to explain in this context. The first time adoption of IASs was
recommended by the SECP in 1986 vide its S.R.O. 777(1)/86 on Aug 6, 1986. However it is difficult to
describe when mandatory adoption began. Then later SROs were issued by SECP to notify the adoption
of other IASs in Pakistan, as issued gradually by IASB. The adoption was not from a single date.
However the SECP in 2005 issued S.R.O. 665 (1)/2005 in exercise of the powers conferred by sub section
(3) of Section 234 of the Companies Ordinance, 1984 on June 28, 2005. In this SRO, SECP withdrawn
it’s SROs issued from 1986 to 2004, and notified the “thirty one” (31) IASs to be followed in preparation
of financial statements. IAS were: 1, 2, 7, 8, 10, 11, 12, 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 26, 27, 28,
30, 31, 32, 33, 34, 35, 36, 37, 38, 39, and 40. In this way gradually all the IAS/IFRSs issued by the IASB
have been notified by SECP through different notifications. The date of notification issued by SECP and
the effective date are different. According to the ICAP’s schedule of effective dates for revised and/or
reformatted IAS/IFRSs only one standard is effective since 1984, one since 1994, one since 1988, two
since 1995, one since 1998, three in 1999, 13 in 2005, and of total 38 IAS/IFRSs.
We referred this adoption as mandatory adoption, as EU and U.S. announced it the mandatory adoption.
Our study is solemnly based on this classification of adoption. We conducted the statistical analysis on
the pre and post adoption basis, by assuming the mandatory adoption which got effective from 1st July,
the start of fiscal year, in 2005.
LITERATURE REVIEW
During the last two decades the area of value relevancy acquired the larger attention and was addressed
by lot of research studies. This huge concentration was the result of beliefs emerged during 1990s that the
accounting information is becoming less value relevant. The first phase of studies conducted during the
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International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
1990s attends to check the reasons of decreasing value relevancy and measures to improve it. Later
studies concentrated on the effects of IAS/IFRS adoption on the value relevancy which began in 2005.
“Value-relevance” entails the ability of the financial information enclosed in the financial reports to
explain the stock market measures; Vishnani & Shah (2008). Following given is the literature reviewed
on the value relevance of numbers and IAS/IFRS adoption.
Need for Harmonization of Reporting Standards
People who are in the favor of harmonized IAS claim that the same treatment or single set of rules for all
the countries will ensure the similar treatment of transactions by all the companies of different countries
throughout the world. Nevertheless, the academic research challenge that how a single set of accounting
standards can be applied throughout the world who has countries with different political, social, and
economic environment.
However, previous studies on IAS discoveries those firms are not compliant in meeting even the easily
noticeable disclosure requirements (Street and Gray 2001). Moreover, studies of the properties of
accounting output find that similar standards are applied very in a different way around the world (Ball,
Robin and Wu 2003). But many studies findings prove that the it’s better to have same Accounting
standards instead of having different because it will help the global comparability of financial
information. Specifically, most authors point to either regulatory oversight or capital market pressures
(Land and Lang 2002, Ball, Robin and Wu 2003, Burgstahler, Hail and Leuz 2006).
Supporters of harmonized international accounting standards argue that if all organizations use similar
accounting standards in their financial reporting, financial statements of business would be more
standardize and consistent disclosure and more helpful information to decision maker (e.g., Purvis et al,
1991). Literature shows that complicated institutional elements effects financial reporting quality (e.g.,
Ball, 2001).
Impacts of IAS/IFRS Adoption
Financial decisions and estimation of firms future financial performance is given to investors transparent
by IFRS (Street and Bryant, 2000) previous literature shows improvement due to adopting IFRS in
accounting quality of publicly traded European companies (E.g. Daske and Gebhardt, 2006; Barth et al.,
2008). Therefore, IFRS adoption is likely to reduce exploitation in earnings and improve stock market
efficiency (Kasznik, 1999; Lenz, 2003). IFRS adoption is likely to develop transparency; disclosure and
comparability (Biddle and Saudagaran, 1989).
The adoption of IFRS would shrink asymmetric information consequently smooth the communication
among the management, investors, and other stakeholders (Bushman and Smith, 2001) and that will result
in reduction of agency cost (Healy and Palepu, 2001) from this (El-Gazzar et al, 1999; Botosan and
Plumlee, 2002) says that decreasing asymmetric information will lead to reduction in cost of equity and
cost of debt. After then it is again confirmed by Leuz and Verrecchia, (2000), they said that there are
proofs of IFRS adoption that leads to reinforces stock market liquidity and direct us to reduction in cost of
capital, sot of transactions higher market value and better reputation. Adoption of IFRS is also likely to
impact positively on stock returns of company and stock relevant to financial performance measures
(Guidry et al, 1999; Chung et al, 2002).
Most of academics of accounting recommended that IAS (International Accounting Standards) are
considered more value relevant than GAAP prevailing domestic, high quality accounting standards and its
significant predictability (Harris and Muller, 1999; Davis-Friday and Rueschoff, 1999; Lenz, 2003; Bao
and Chow, 1999) previous studies presents that code law’ countries, like European counties, where funds
supplied by state, banks or families likely to more crucial than in common law countries like North
America, where capital is supplied by private investors (La Porta et al., 1997) therefore those counties
which have strong investor protection system like UK, the IFRS adoption cost is likely to be less than due
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Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
to lever of earnings management is less as management is lower inclined to control the reported figures of
accounting (Nenova, 2003; Dyck and Zingales, 2004; Renders and Gaeremynck, 2007). On other hand
those countries which have comparative weak investor protection system, the financial reporting quality
will be reduced because of more earnings management scope, reflecting the higher cost of IRS adoption
(Ali and Hwang, 2000; Hung 2001).
Evidence from studies on Reconciliation of Annual Reports from two different Accounting
Setups
Harris and Muller (1999), using 31 companies, reconciled IFRS-US GAAP annual reports between 1992–
1996 using Multiple linear regression (Earnings and Ohlson models). They found that reconciliations are
value-relevant; IFRS are more closely associated with prices-per-share than US GAAP, but US GAAP is
more closely associated with returns than IFRS. Bartov et al. (2005), reconciled annual reports of 417
companies (US GAAP, German GAAP and IFRS) from, 1998 to 2000; used linear regression. They
found that US GAAP and IFRS are more value relevant than German GAAP. Lin and Chen (2005)
reconciled annual reports of 415 companies (reconciliation of Chinese GAAP and IFRS) for 1995–2000
using multiple linear regressions (Earnings and Ohlson model). They found Chinese GAAP more value
relevant than IFRS. Schiebel (2006) reconciled annual reports of 12 German companies (GAAP and
IFRS) from 2000 to 2004 using linear and exponential regression (panel data). He found German GAAP
more value relevant than IFRS. Niskanen et al. (2000) reconciled annual reports of 18 companies
(reconciliation of Finnish GAAP and IFRS) for a period of 1984–1992 using multiple linear regressions
(Earnings model). However, they found that reconciliations do not appear to be value-relevant. Ahmed
and Goodwin (2006) analyzed the effect of adoption of IFRS in Australia. They found that IFRS earnings
are higher than AGAAP earnings whereas AIFRS equity is lower than AGAAP equity, and more firms
have earnings decreases than increases. The effect on ratios is most significant for leverage where the
AIFRS ratio is higher than AGAAP ratio. They also found that AGAAP reported financial information is
more value relevant compared to AIFRS reported financial information.
Contradictory Views from Value relevance Researches
Inspite of large evidence on the relevance of accounting information in share price determination,
criticism also exist on this issue. Critics don’t condemn on the relevance of all the accounting numbers
but book value of equity and earnings. Barth (2000) includes the literature on criticism. This challenged
the use of the variables discussed above in standard setting process. These researchers argue that standard
setting can be improved with the extent to which accounting deals with the equity valuation.
Related previous studies in Pakistan
In Pakistan, there is weak or no background for the value relevance and IAS/IFRS researches. To our
knowledge, no study for testing value relevance of accounting information is conducted yet. Even no
study on the impacts of IFRS/IAS adoption is there. However there are some studies conducted on the
accounting developments, like Ashraf and Ghani (2005). This study did not include the empirical and
econometrical analysis. Except this study a recently published study of Malik (2011) addressed the value
relevance of accounting information among major fundamentals in Pakistan. However it doesn’t consider
impacts of IASs adoption by Pakistan. Use of accounting information for stock valuation as a model is
also not included in the study. It concluded that there earnings has highest statistical relationship with
share price.
Inferences Drawn from available Literature
The researches included, provide sufficient support for the current research in context of Pakistan. These
researches show that still there many conflicts, and contradictions. Ali and Hawang (2000) argued that
value relevance of accounting information is determined by country factors. So this study can find
whether the Pakistan, a developing country, with less involvement of private sector in standard setting,
has value relevant financial information. There is no previous research for this issue. Results of previous
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Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
studies are conflicting and generate the need for further studies. So keeping all these facts in view, we
recommend this study to be conducted. The fact of less or no well defined body of knowledge related to
the impacts of IAS/IFRSs in Pakistan encourages researcher.
RESEARCH METHODOLOGY
The study has three variables, two independent and one dependent variable. Independent variables are
Earnings and Book value. The dependent variable is Market Value. Share price is taken for the companies
after three months of the financial year end. Book Value was calculated as total equity of the firm less
preference equity divided by the total numbers of shares outstanding. EPS is the simply earnings for per
share outstanding, calculated as net income available for ordinary shareholders divided by numbers of
ordinary shares outstanding.
Variables are selected on the basis of literature reviewed, Kadri, Aziz and Mohamed, (2009); Callao,
Jarne and Lainez (2007); Gaston, et al. (2010) and many others also commented that these variables are
best used in technical analysis due to more explanatory power for market value of shares. Using BVPS
and EPS for testing value relevance is a natural place to look for the impact of accounting standards on
reporting quality.
Following hypotheses are formulated to test statistically:
a. MVPS is significantly determined by the BVPS and EPS for whole study period data.
b. MVPS is significantly determined by the BVPS and EPS for before adoption study period data.
c. MVPS is determined represented by the BVPS and EPS for after adoption study period data.
Based on the previous literature and variables under study following hypothesis are designed. These
hypotheses can be categorized in the following way:
To draw the inference about the impact of IAS/IFRSs adoption on value relevance of financial
information (BVPS and EPS) the study used a systematic way of sampling. Sampling is based on the
market capitalization of firms at the day of analysis. We determine the weights of each sector’s
capitalization towards the total economy. Then arrange the companies within a sector on the basis of their
proportionate market capitalization. Companies are selected from a sector on the basis of the proportion
of that sector to total economy. In this way fifty two (52) largest companies are included in the analysis.
Required data was collected from the annual reports of the companies and the balance sheet analysis
reports for joint stock companies issued by the State Bank of Pakistan. Directives of the SECP and ICAP
were also be used. KSE website was used to gather market prices of shares for three months later the
financial years.
The data will be processed and analyzed through any statistical package e.g. SPSS and Minitab.
Regression test will be performed to infer the impact of IASs adoption on value relevance of book value
and earnings. Regression analysis will be conducted at three levels, first for whole study period, second
for before adoption and third for after adoption. Evidences show that 42% of total IAS/IFRSs are adopted
by ICAP in 2005. So the results of three stage regression analysis will be compared to check whether
IASs adoption in 2005 affected the value relevancy of financial information of selected PLCs. In this
regard a pre (2002-04) and post (2005-09) analysis is conducted.
In study we conducted the analysis for 8 years data. 4 Years are treated before period and 4 years are after
period. Detail is provided in the following table. We used the Ohlson (1995) to investigate the impact of
IAS adoption on value relevance of BVPS and EPS. The model can be illustrated using a linear function:
MVPS = a + b1 [BVPS] + b2 [EPS]
Eq. 1
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Where “MVPS” is Market value, “BVPS” is Book Value, “EPS” is earnings, “a” is constant and “b” is
the slope. Following statistical techniques are used to test our hypothesis:
• OLS (Ordinary Least Squares) Regression for simple firm-year data
• Panel Data Regression (Fixed Effects) for firms included in analysis
EMPIRICAL FINDINGS AND CONCLUSIONS
Hypotheses are tested at two stages. At first regression analysis is conducted through the Excel using
firm-years data. Then in second step same analysis is conducted through “Gretl” using panel data
approach.
Regression tests are performed to identify the relationship between dependent variable and independent
variables. Book value and earnings are said to be value relevant if the relationship between market value,
book value and earnings are significant. Book value and earnings are not value relevant if the relationship
with market value is not significant. A few tools are used to measure the relationship between market
value, book value and earnings. First, R is used to find the correlation between market value and book
value. Second, R2 indicates how many percent of the variation in dependent variable is explained by
independent variables. Third, adjusted R2 measures the goodness of model fit. In addition, p-value is used
to measure whether individual independent variables are significant or not, a p-value of 0.05 and below
shows that individual independent variable is significant.
OLS Regression
For the hypothesis “i”, MVPS is significantly determined by the BVPS and EPS for whole study period
data following summary and outputs are given by Excel:
Table 1: OLS Regression Results for overall study period
Multiple R
0.67
R Square
0.45
Adjusted R Square 0.45
P-value of BVPS
0.00
P-value of EPS
0.00
Equation
MVPS = 35.4 + 0.390 BVPS + 5.42 EPS
Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2
value shows that there is the significant value relevancy in the amounts for BVPS and EPS during whole
study period by using 8 years data. So we accept our hypothesis “i”. P-value is below than 0.05 and R2
value also shows the model’ fitness.
For the hypothesis “ii”, MVPS is significantly determined by the BVPS and EPS for before adoption
study period data, following summary and outputs are given by Excel:
Table 2: OLS Regression Results for before adoption period
Multiple R
0.64
R Square
0.41
Adjusted R Square 0.40
P-value of BVPS
0.00
P-value of EPS
0.00
Equation
MVPS = 28.0 + 0.470 BVPS + 5.78 EPS
27
Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
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Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2
value shows that there is the significant value relevancy in the amounts for BVPS and EPS during before
adoption period by using 4 years data. So we accept our hypothesis “ii”. P-value is below than 0.05 and
R2 value also shows the model’ fitness.
For the hypothesis “iii”, MVPS is determined represented by the BVPS and EPS for after adoption study
period data, following summary and outputs are given by Excel:
Table 3: OLS Regression Results for after adoption period
Multiple R
0.74
R Square
0.55
Adjusted R Square 0.55
P-value of BVPS
0.89
P-value of EPS
0.00
Equation
MVPS = 33.4 + 0.018 BVPS + 8.44 EPS
Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2
value shows that there is the significant value relevancy in the amounts for BVPS and EPS during after
adoption period by using 4 years data. So we accept our hypothesis “iii”. P-value is below than 0.05 and
R2 value also shows the model’ fitness.
As per regression analysis using firm-years data we can make some inference for our hypotheses, degree
of determination for the fitted model is greater during after adoption period. Adjusted R-square is 40.44 %
for before adoption period, its 55.09 % for after adoption period. So we conclude that value relevance has
increased after the adoption of selected international accounting standards.
Panel data Regression, Fixed Effects Model (FE)
Same hypothesis are tested again by using a more sophisticated technique named as Panel regression. The
simple difference between the OLS (Ordinary Least squares) regression and panel regression stands in
data orientation used. OLS uses the data as cross sectional. However the observations are taken by the
panel regression are considered for cross sectional plus time series at the same time. By using panel
regression, software is able to differentiate between the values of one cross sectional unit to other. In this
way analysis yields the overall relationship between the variables on both the dimensions.
Panel regression technique is divided into normally three types. These three types include Fixed Effects
Model, Random Effects Model, and Pooled OLS, which is usually referred as LSDV (Least Squares
Dummy Variable Analysis). We chose the FE model for our research. This model is used to generalize
the effects on the given sample units. It is also used to control unobserved heterogeneity.
For the hypothesis “vii”, MVPS is significantly determined by the BVPS and EPS for whole study period
data following summary and outputs are given:
Table 4: Panel Regression (FE Model) Results for whole study period
R-squared
Adjusted R-squared
P-value of BVPS
P-value of EPS
Equation
0.73
0.69
0.00
0.00
MVPS = 80.3588 + 0.347256BVPS + 3.02193EPS
28
Copyright © 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies
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Table shows that whole study period data has significant value relevancy in the BVPS and EPS figures.
However it should be noted that there is improved result for R-squared and Adjusted R-squared after
using the panel approach (fixed effects model). So we don’t reject our hypothesis “i”.
For the hypothesis “ii”, MVPS is significantly determined by the BVPS and EPS for before adoption
study period data, following summary and outputs are:
Table 5: Panel Regression (FE Model) Results for before adoption study period
R-squared
0.80
Adjusted R-squared
0.73
P-value of BVPS
0.00
P-value of EPS
0.14
Equation
MVPS = 27.1298 + 1.14829 BVPS + 0.412995 EPS
Table shows that before adoption study period data has significant value relevancy in the BVPS and EPS
figures. However it should be noted that there is improved result for R-squared and Adjusted R-squared
after using the panel approach (fixed effects model). So we don’t reject our hypothesis “ii”.
For the hypothesis “iii”, MVPS is significantly determined by the BVPS and EPS for before adoption
study period data, following summary and outputs are:
Table 6: Panel Regression (FE Model) Results for after adoption study period
R-squared
0.91
Adjusted R-squared 0.88
P-value of BVPS
0.73
P-value of EPS
0.00
Equation
MVPS = 149.383+0.0305345 BVPS+2.89566 EPS
Table shows that after adoption period data has significant value relevancy in the BVPS and EPS figures.
However it should be noted that there is improved result for R-squared and Adjusted R-squared after
using the panel approach (fixed effects model). So we don’t reject our hypothesis “iii”.
On the basis of overall panel regression can infer that degree of determination for the fitted model is
greater during after adoption period. Above tables show that value relevancy is higher during after
adoption period data. Adjusted R-squared is higher for after adoption period (87.51%) than before
adoption period (72.88%).
CONCLUSIONS
Research on value relevance of accounting numbers is not new. The application of the model to see the
effects of IFRS/IAS on value relevance of accounting numbers is not also new. However the research on
the effect of IFRS/IAS on accounting numbers in Pakistan is still new. Current study investigates the
effect of adoption of IFRS/IAS on value relevance of book value and earnings of Pakistani PLCs under
two different situations. Based on the results of the study a few conclusions can be made:
§ First, it shows that book value and earnings of selected Pakistan’s PLCs are value relevant
throughout the period under study.
§ Second, the results also show that book value and earnings of firms are more value relevant
during the IFRS/IAS adoption period than before mandatory adoption period. This might be due
to the introduction of fair value related new reporting standards.
§ Third, this study has proven that in the short run the introduction of IFRS/IAS leads to narrower
gap between market and book value.
29
Copyright © 2011. Academy of Knowledge Process
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§
Fourth, the financial information provided in annual report is more relevant in making investment
decision.
Country related factors as discussed by the Ali and Hawang (2007) are seemed to be less affecting in
context of Pakistan. IAS adoption is beneficial for investors and analysts of fundamental analysis, by
providing value relevant financial information. ICAP should continue to adopt the standards issued by the
IASB. All the newly issued IFRSs should also be adopted soon. ICAP should also facilitate the adoption
process and make it sure that adoption is being made at once. Implementation guidance would increase
the quality of financial reporting in the corporate sector of Pakistan.
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Appendix 1: Statistics of Sampling Process
Sectors
Cotton Textile sector
Other Textile Sector
Chemical Sector
Engineering Sector
Sugar Sector
Paper and board sector
Cement Sector
Fuel and Energy Sector
Transport and Communication Sector
Tobacco Sector
Jute Sector
Vanaspati and Allied Industries Sector
Miscellaneous Sector
Total
X1
X2
167
31
34
38
35
9
20
24
7
67
X4
X5
X6
X7
X8
X9
5
3
4
3
4
3
125
11
29
35
31
6
16
21
7%
2%
23%
8%
2%
1%
5%
19%
8
0
7
3
1
0
1
4
2
2
2
2
2
2
2
2
16
0
14
6
2
0
2
8
4
0
6
0
1
0
0
2
12
0
8
6
1
0
2
6
2
5
8%
0
2
0
0
0
3
3
1%
1%
0
0
2
2
0
0
0
0
0
0
3
0%
0
2
0
0
0
44
332
25%
100%
11
35
2
-
22
70
5
18
17
52
14
401
X3
69
X1: Companies that remained listed during whole study period, X2: Companies not having Data for
Independent Variables, X3: Companies Qualified for Sampling, X4: Proportion of Sector toward Total
Market Capitalization, X5: No. of Companies Selected, X6: Multiplier for margin, X7: No. of Sample
companies from each sector, X8: Companies for which Market Values are not available, X9: Companies
included in the analysis.
33
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International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
Appendix 2: List of Companies included in the Analysis
Gul Ahmed Textile Mills Ltd.
Indus Dyeing & Manufacturing Co. Ltd.
Nishat (Chunian) Ltd.
Sapphire Fibres Ltd.
Sapphire Textile Mills Ltd.
Artistic Denim Mills Ltd.
Fazal Cloth Mills Ltd.
Fazal Textile Mills Ltd.
Gadoon Textile Mills Ltd.
Masood Textile Mills Ltd.
Quetta Textile Mills Ltd.
Mahmood Textile Mills Ltd.
Abbott Lab. (Pakistan) Ltd.
Dawood Hercules Chemicals Ltd.
GlaxoSmithKline Pakistan Ltd.
ICI Pakistan Ltd.
Engro Corporation Limited (Engro Cheml
Pakistan Ltd.)
Ferozsons Laboratories Ltd.
Searle Pakistan Ltd.
Sitara Chemical Industries Ltd.
Al-Ghazi Tractors Ltd.
Indus Motor Company Ltd.
Millat Tractors Ltd.
International Industries Ltd.
Atlas Honda Ltd.
Siemens Pakistan Engineering Co. Ltd.
JDW Sugar Mills Ltd.
Lucky Cement
D.G Khan Cement Company Ltd.
Karachi Electric Supply Company Ltd.
National Refinery Ltd.
Sui Southern Gas Company Ltd.
Mari Gas Co. Ltd.
Kohinoor Energy Ltd.
Altern Energy Ltd.
Bata Pakistan Ltd.
Ghani Glass Ltd.
Ismail Industries Ltd.
National Foods Ltd.
Nestle Pakistan Ltd.
Pakistan Services Ltd.
Rafhan Maize Products Co. Ltd.
Treet Corporation Ltd.
Tri-Pack Films Ltd.
Service Industries Ltd.
Murree Brewery Company Ltd.
Shifa International Hospital Ltd.
Gillette Pakistan Ltd.
Shezan International Ltd.
Shabbir Tiles and Ceramics Ltd.
Clover Pakistan Ltd.
Mitchell's Fruit Farms Ltd.
34
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International Journal of Contemporary Business Studies
Vol: 2, No: 9.September, 2011 ISSN 2156-7506
Available online at http://www.akpinsight.webs.com
Appendix 3: S.R.O. 665(1)/2005
35
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