Value Relevance of Accounting Information in an Emerging Stock Market: The Case of Pakistan

Abstract

This study aims to empirically examine the value relevance of accounting information for the listed firms in an emerging stock market. By following the recommendations of Kothari and Zimmerman (1995), we use both the price and the return models to investigate whether the financial statements of PSX listed firms meet the criteria or relevance and reliability as highlighted in the conceptual framework 2010. This study is based on annual data of all the non-financial firms listed in Pakistan Stock Exchange (PSX). Overall findings of our study confirm that accounting information is value relevant to the investors in PSX, thereby giving evidence that financial statements achieve their primary objectives. Further, we examine the impact of new accounting standards on the value relevance of accounting information. Surprisingly, we find that new accounting standards have resulted in the declining the value relevance of accounting data. Finally, we find that investors in PSX distinguish accounting information based on the auditor type, earnings sign and firm size. Our findings are robust when controlling for other factors that may affect our regression results.