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Have financial statements lost their relevance? Empirical evidence from the frontier market of Kuwait

Have financial statements lost their relevance? Empirical evidence from the frontier market of... PurposeAnecdotal concerns expressed regarding developed capital markets suggest that the information provided in financial statements has lost its value relevance to equity holders over time. This study investigates the issue from the perspective of Kuwait, which is a frontier market. Design/methodology/approachConsistent with prior research, the design employs the price regression model. A total of 2,490 observations were collected from all firms listed on the Kuwait Stock Exchange (KSE) over a period of 21 years (1994–2014). FindingsAlthough this study documents a notable decline in both the value relevance of earnings and book value for equity holders over this period, the results suggest that the decline in the value relevance of earnings was deeper and more pronounced than that of book value. Practical implicationsBecause a fundamental prerequisite for the value relevance of accounting information is the quality of the financial reporting environment, the results are useful for regulators because they provide an assessment of the effectiveness of the current financial reporting environment. The results highlight the need for improvements because higher-quality information helps equity holders to determine value more precisely. As the timely dissemination of financial statements is an essential ingredient contributing to the relevance of financial statements, a direct implication of the study’s findings for the management of KSE companies is that timely reporting of financial statements may mitigate the observed decline of the value relevance of financial statements produced by KSE companies.Originality/valueThis study contributes to the capital market research regarding changes in the value relevance of financial statement information through an empirical examination of a frontier capital market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Advances in Management Research Emerald Publishing

Have financial statements lost their relevance? Empirical evidence from the frontier market of Kuwait

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0972-7981
DOI
10.1108/JAMR-06-2015-0043
Publisher site
See Article on Publisher Site

Abstract

PurposeAnecdotal concerns expressed regarding developed capital markets suggest that the information provided in financial statements has lost its value relevance to equity holders over time. This study investigates the issue from the perspective of Kuwait, which is a frontier market. Design/methodology/approachConsistent with prior research, the design employs the price regression model. A total of 2,490 observations were collected from all firms listed on the Kuwait Stock Exchange (KSE) over a period of 21 years (1994–2014). FindingsAlthough this study documents a notable decline in both the value relevance of earnings and book value for equity holders over this period, the results suggest that the decline in the value relevance of earnings was deeper and more pronounced than that of book value. Practical implicationsBecause a fundamental prerequisite for the value relevance of accounting information is the quality of the financial reporting environment, the results are useful for regulators because they provide an assessment of the effectiveness of the current financial reporting environment. The results highlight the need for improvements because higher-quality information helps equity holders to determine value more precisely. As the timely dissemination of financial statements is an essential ingredient contributing to the relevance of financial statements, a direct implication of the study’s findings for the management of KSE companies is that timely reporting of financial statements may mitigate the observed decline of the value relevance of financial statements produced by KSE companies.Originality/valueThis study contributes to the capital market research regarding changes in the value relevance of financial statement information through an empirical examination of a frontier capital market.

Journal

Journal of Advances in Management ResearchEmerald Publishing

Published: Aug 1, 2016

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