THE VALUE RELEVANCE OF THE FINANCIAL STATEMENTS’ BOTTOM LINES IN THE EMERGING EGYPTIAN CAPITAL MARKET
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Published
Mar 1, 2015
Abstract
This study aims to examine the value relevance of the bottom lines of the financialstatements in the Egyptian context after the inception of the new version of EgyptianAccounting Standards of 2006. Considering the tradition accounting value ofconservatism and the firm size, the price and return models are operationalized usinga sample of the most actively traded companies on the Egyptian Stock Market inthe period from 2007-2009. Three important conclusions captured from the results;first, the bottom lines of the financial statements are value relevant and the accrualcomponents are upper handed over the cash flow in estimating the market value ofthose firms. Second, conservatism practices is still alive in the Egyptian context;however, it does not prevent the accounting information from being value relevant.Third, the promulgation of the new version of EASs shifts the value relevance towardsbook value over the other accounting information. These results should be interpretedin the light of the rapid shift towards capitalism and the deregulation program followedby the Egyptian government in the recent years. Also, these results might possibly beattributed to a significant improvement in the familiarity of the preparers of accountinginformation with the new accounting practices and the needs of financial reportingusers in Egypt. As such, this study contributes to the existing literature by investigatingand operationalizing the value relevance of accounting information in an emergingmarket such as Egypt after the introduction of the new version of EASs of 2006.
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Keywords
Emerging MarketEgyptConservatismEASs
References
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• Brimble, M., and Hodgson, A., (2007), “On the intertemporal value relevance of conventional financial accounting in Australia”, Accounting and Finance, Vol. 47(4), pp. 599–622.
• Chen, C., Chen, S., and Su, X., (2001), “Is accounting information value-relevant in the emerging Chinese stock market”, Journal of International Accounting, Auditing and Taxation, Vol.10 (1), pp.1-22.
• Chen, P., and Zhang, G., (2007), “How do accounting variables explain stock price movements? Theory and evidence”, Journal of Accounting and Economics, Vol. 43(2-3), pp. 219-244.
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• Covrig, V., Lau, S. T., and Ng, L., (2006),“Do domestic and foreign fund managers have similar preferences for stock characteristics? A cross-country analysis”, Journal of International Business Studies, Vol. 37(3), pp. 407-429.
• Dahawy, K., Shehata, N. F., and Ransopher, T., (2011), “The state of accounting in Egypt: a case”, Journal of Business Cases and Applications, Vol.3, pp. 68-79.
• Dechow, P. M., Hutton, A. P., and Sloan, R. G., (1999), “An empirical assessment of the residual income valuation model”, Journal of Accounting and Economics, Vol.26, pp. 1-34.
• Doupnik, T.S. and Salter, S.B. (1993), “ An Empirical Test of a Judgmental International Classification of Financial Reporting Practices”, Journal of International Business Studies, Vol. 24, pp. 41–60.
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• Easton, P., (1999)., “Security returns and the value relevance of accounting data”, Accounting Horizons, Vol. 13 (4), pp. 399-412.
• Easton, P., Shroff, P. and Taylor, G., (2000), “Permanent and transitory earnings, accounting recording lag, and the earnings coefficient”, Review of Accounting Studies, Vol. 5, pp. 281-300.
• FASB (1980), “Qualitative Characteristics of Accounting Information: Statement of Concepts No. 2, Stamford”, CT: FASB.
• Feltham, G. and Ohlson, J., (1995), “Valuation and clean surplus accounting for operating and financial activities”, Contemporary Accounting Research, Vol. 11 (2), pp. 689-731.
• Francis, J., and Schipper, K. (1999), “ Have financial statements lost their relevance? “, Journal of Accounting Research, Vol. 37(2), pp. 319-352
• Giner, B. and Reverte, C. (2001). “Valuation implications of capital structure: a contextual approach.” The European Accounting Review, Vol. 10 (2), pp. 291-314.
• Graham, R., King, R., and Bailes, J. (2000), “The value relevance of accounting information during a financial crisis: Thailand and the 1997 decline of the baht”, Journal of International Financial Management and Accounting, Vol. 11 (2), pp.84-107.
• Gray, S. J. (1988), “Towards a Theory of Cultural Influence on the development of Accounting Systems Internationally”, Abacus, 24(1), pp.1-15.
• Green, C. J., Maggioni, P., and Murinde.V., (2000), “Regulatory lessons for emerging stock markets from a century of evidence on transactions costs and share price volatility in the London Stock Exchange”, Journal of Banking &Finance, Vol. 24, pp. 577-601.
• Gujarati, D.N. (2003), “Basic Econometrics”, third edition, McGraw Hill, Inc., New York, NY.
• Hall, C., Hamao, Y. and Harris, T.S., (1994), “A comparison of the relations between security market prices, returns and accounting measures in Japan and the United States”, Journal of International Financial Management and Accounting, Vol. 5(1), pp. 47-73.
• Harris, T., Lang, M. and Moller, H.P., (1994), “The Value Relevance of German Accounting Measures: An Empirical Analysis”, Journal of Accounting Research, Vol. 32 (2), pp. 187-209.
• Harrison, G. L., and McKinnon, J. L., (1986), “Culture and accounting change: A new perspective on corporate reporting regulation and accounting policy formulation”, Accounting, Organizations and Society, Vol. 11(3), pp.233-252.
• HassabElnaby, H. R., and Mosebach, M., (2005) “Culture’s consequences in controlling agency costs: Egyptian evidence”, Journal of International Accounting, Auditing and Taxation, Vol. 14, pp 19–32.
• Haw, I-M., Qi, D., and Wu, W., (2001), “ The nature of information in accruals and cash flows in an emerging capital market: The case of China”, The International Journal of Accounting, Vol. 36, pp. 391-406.
• Hellstrom, K., (2006), “The value relevance of financial accounting information in a transition economy: The case of the Czech Republic”, European Accounting Review, Vol. 15(3), pp. 325-
• Henning, S. and Stock, T. (1997), “The Value-Relevance of Goodwill Write-Offs”,AAA Annual Meeting.
• Hodgson, A., and Clarke, S.P., (2000),“Earnings, cash flow and returns: functional relations and the impact of firm size”, Accounting and Finance, Vol. 40(1), pp. 51-73.
• Hofstede, G. H. (1980). Culture’s consequences: international differences in workrelated values. London, Sage.
• Humphreys, M. (1996) “Culture Differences and Its Effect on the Management of Technical Education”, Leadership and Organization Development Journal, Vol. 17 (2), pp. 34-41.
• Joos, P. and Lang, M. (1994), “The effects of accounting diversity: evidence from the European Union”, Journal of Accounting Research, Vol. 32 (3), pp. 141-168.
• Kang, J., and Stulz, R., (1997), “Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan”, Journal of Financial Economics, Vol.46, pp. 3-28.
• Kantor, J., Roberts, C.B. and Salter, S.B. (1995), “Financial Reporting Practices in Selected Arab Countries: An Empirical Study of Egypt, Saudi Arabia, and The United Arab Emirates”, International Studies of Management and Organization, Vol. 25, No. 3, pp. 31-50.
• Kim, J., and Yoo, S. S., (2009), “Market liberalization and foreign equity portfolio selection in Korea”, Journal of Multinational Financial Management, Vol. 19, pp. 206-220.
• Kothari, S. and Zimmerman, J. (1995), “Price and Return Models”, Journal of Accounting and Economics, Vol. 20 (2), pp. 155-192.
• Kothari, S. and Warner, J. (1997), ‘‘Measuring long-run horizon security price performance’’, Journal of Financial Economics, Vol. 43 No. 3, pp. 301-40.
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How to Cite
Abousamak, Ahmed. 2015. “THE VALUE RELEVANCE OF THE FINANCIAL STATEMENTS’ BOTTOM LINES IN THE EMERGING EGYPTIAN CAPITAL MARKET”. Studies in Business and Economics 18 (1). https://doi.org/10.29117/sbe.2015.0081.
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Articles