Impact of Firm's Value Relevance of Accounting Information on Stock Returns during Market over and under Reactions in Pakistan

Abstract

Value relevance of accounting information (VRAI) is a fundamental characteristic of influencing stock returns. This study analyzes the impact of VRAI on stock returns during market under and overreaction in Pakistan. The data of 322 non-financial firms listed in PSX from 2005 to 2022 is used. To explain stock returns, we employ the annual stock returns and buying and holding returns model. The data on financial variables has been collected from annual reports published on the company's websites and PSX Data Stream. The outcomes show that the accounting information variables earnings per share and change in earnings per share are positively related to the stock returns during market over and under reaction. Earnings per share, net income and book value are significantly related to the BHAR diuuring market under and overreaction while earnings per share and book value are significantly related to the BHAR during market overreaction of non-financial firms. It is also concluded that balance sheet variables attract more investors to invest in the stock market during the underreaction of non-financial firms. Therefore, it is suggested that the non-financial firms must present adequate accounting information on their financial statements within the specified time frame.