Value relevance of accounting earnings and cash flows in a transition economy: the case of Serbia

Abstract

PurposeThe purpose of the study is to investigate the association of earnings and cash flows with stock prices and returns, and the impact of regulatory changes on the value relevance of accounting numbers.Design/methodology/approachThe authors examine a sample of non-financial firms listed on the Belgrade Stock Exchange from 2005 to 2018 and use three regression models – price, return and differenced.FindingsThe authors find evidence that accounting earnings are more value relevant than cash flows. The authors also find negative relation of earnings changes with stock returns and argue that this is due to the lower persistence of negative earnings levels and changes. Finally, the authors find that the value relevance of accounting information in Serbia increases after the improvements in capital market regulation.Research limitations/implicationsGiven the empirical focus on a transition economy, the widespread applicability of the study is limited. The findings, however, call for more research on transition economies to better understand the functioning of capital markets and the way information from financial statements is incorporated into stock prices.Practical implicationsThe results imply that policymakers in transition economies should improve the accounting and capital market regulation to provide better investor protection and to improve the capital market conditions.Originality/valueThe authors add to knowledge about the value relevance of accounting information in emerging and transition economies. The results could be of interest to standard setters in their efforts to better understand and improve the quality of accounting information in emerging and transition economies.

The value relevance of accounting information: empirical evidence from Jordan

“…Chen et al (2001) have reported that book value and earnings are value-relevant in various segments of the Chinese stock market based on empirical evidence from 1991 to 1998. Other researchers (Ragab and Omran, 2006;Bae and Jeong, 2007;Pourheydari, Aflatooni, and Nikbakhat, 2008;Al-Hares, AbuGhazaleh, and Haddad, 2012;Bilgic and _ Ibis, 2013;Omokhudu and Ibadin, 2015;Ahmadi and Bouri, 2018;Rahman and Liu, 2021;Srivastava and Muharam, 2021;Cupic et al, 2022) have found similar results in different global markets. Ragab and Omran (2006) have conducted research to examine the relevance of earnings value and book value in the Egyptian Stock Market from 1998 to 2002.…”

“…Several empirical research studies have examined the value relevance of accounting information using the pricing model in established markets based on Ohlson’s theoretical framework for valuation. These studies model market value as a function of book value and reported earnings in addition to evaluating the value relevance of earnings and book value (Bettman et al , 2006; Brief and Zarowin, 1999; Collins et al , 1997; Cupic et al , 2022; Barth et al , 1996; Bernard, 1995; Stark and Thomas, 1998).…”

“…They discovered that accounting information, such as earnings and book value, had value relevance throughout the IFRS enforcement period. Cupic et al (2022) investigate the relationship between earnings and cash flows and stock prices and returns in a sample of non-financial companies listed on the Belgrade Stock Exchange between 2005 and 2018. According to the authors, accounting earnings are clearly more valuable than cash flows.…”