The value relevance of earnings, cash flows and book values in Egypt

Abstract

Purpose Motivated by the lack of research on the value relevance of accounting information in the emerging markets of Middle Eastern countries, and the unique institutional and accounting setting in Egypt, this paper aims to investigate the relation between capital market and accounting information in the emerging market of Egypt. Specifically, based on Egyptian data, this study examines the value relevance of earnings, cash flows from operations and book values. Design/methodology/approach To examine the value relevance of the above accounting measures, this study uses statistical associations between accounting information and capital market values: the association between earnings and annual returns; the association between cash flows and accruals, and annual returns; and the association between earnings and book values of equity, and stock prices. Findings The results show that, first, earnings have value relevance. However, earnings changes are significantly more successful than earnings levels in explaining security returns. These results suggest that changes in earnings are largely permanent; hence, earnings follow (close to) a random walk model. Second, contrary to what is stated in the literature, cash flows from operations are not successful in explaining stock returns. This result suggests that cash flows are less important and not value relevant in Egypt compared to the USA or the UK. A possible explanation is that cash flows in Egypt are very volatile (high variance) and not persistent, so the market does not rely on them. Third, individually, both earnings and book values significantly explain stock prices; however, jointly, earnings have incremental explanatory power beyond book values for stock prices whereas book values do not. These results suggest that in Egypt the income statement is much more important than the balance sheet for valuation purposes. Overall, these results are interesting because they do not completely replicate the results from other countries. Practical implications The existence of value relevance for earnings despite the apparent lack of value relevance for cash flows can be interpreted as indicating that accruals are designed to offset and smooth cash flows’ volatility and low value relevance, so that earnings are relatively more persistent and relevant. These results show that earnings potentially are a much more important and informative measure of a firm’s value than cash flows from operations in Egypt. However, we certainly need the cash flows information as an ex-post validation of the prior earnings. Overall, it appears that the investors in Egypt are looking at the accounting data when evaluating the value of the firm, which is a good sign. However, the empirical findings of this paper are discussed. Originality/value This study contributes to the limited research on value relevance of accounting information in the emerging market of Egypt.

Relevansi Nilai Informasi Akuntansi Pada Laba, Nilai Buku, dan Arus Kas Operasi: Kasus di Perbankan Indonesia

“…Relevansi nilai informasi akuntansi dianggap sebagai area dalam riset akuntansi berbasis pasar (Mostafa, 2016). Relevansi nilai mengacu pada kegunaan informasi akuntansi, dan didefinisikan sebagai kemampuan informasi laporan keuangan untuk mempengaruhi harga saham (Francis & Schipper, 1999).…”

“…Ide penelitian ini berasal dari artikel awal Ball & Brown (1968) yang bertujuan untuk menilai apakah informasi akuntansi memberikan informasi tambahan yang bermanfaa atau sinyal bagi investor di luar, atas semua sumber informasi yang tersedia untuk umum (misalnya pengungkapan sukarela manajer atau rekomendasi analis) (Kothari, 2001;Dumontier & Raffournier, 2002). Dikarenakan nilai pasar perusahaan merupakan sebagai nilai sekarang dari perkiraan arus kas bersih masa depan, memeriksa hubungan antara informasi akuntansi (seperti laba dan nilai buku) dan nilai pasar perusahaan dapat menunjukkan bahwa informasi akuntansi dapat memberikan informasi baru tentang jumlah, waktu dan/atau ketidakpastian arus kas masa depan (Mostafa, 2016). Dwimulyani (2010) menyatakan bahwa harga saham yang diperdagangkan di pasar modal akan berubah dengan masuknya informasi yang berupa kabar baik maupun buruk dari keadaan perusahaan tersebut.…”

“…Di pasar negara berkembang dan ekonomi transisi, relevansi nilai informasi akuntansi belum diperiksa secara ekstensif di mana hanya sejumlah kecil penelitian yang menyelidiki topik ini (misalnya di Cina, Chen et al, 2001;Haw et al, 2001;di Republik Ceko, Hellström, 2006;di Yunani, Papadaki & Siougle, 2007, Dimitropoulos et al, 2010di Malaysia, Pirie & Smith, 2003;Pirie & Smith, 2008;Mirza et al, 2019;di Romania, Filip & Raffournier, 2010;di Mesir, Ragab & Omran, 2006;Mostafa, 2016;di Qatar, Almujamed & Alfraih, 2019;di India, Bhatia & Mulenga, 2019; dan di Tunisi, Ahmadi & Bouri, 2018). Dari sisi objek penelitian yaitu perbankan, ada beberapa peneliti yang mencoba melakukan analisis relevansi nilai informasi akuntansi.…”

“…Dari hasil ini bisa disimpulkan bahwa H4 dapat dibuktikan dari penelitian ini. Hasil penelitian ini sejalan dengan penelitian (Bhatia & Mulenga, 2019;Badu & Appiah, 2018;Mostafa, 2016;Bepari, 2015;Papadatos & Makri, 2013;Habib, 2008). Selain itu, variabel kontrol berupa log total aset juga memiliki pengaruh positif terhadap harga saham perusahaan.…”

Role of Accounting Information in Assessing Stock Prices in Bangladesh

“…Wael Mostafa (2016) conducted a study on the emerging market of Egypt to examine the relation between capital market and accounting information. This study found that both individually earnings and book values significantly explain stock prices; Moreover, earnings have more explanatory power beyond book values for stock prices whereas book values do not.…”