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International Accounting Standards and Value Relevance of Book Value and Earnings: Panel Study From Pakistan

International Accounting Standards and Value Relevance of Book Value and Earnings: Panel Study From Pakistan

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Published by Rana Muhammad Azeem
International Journal of Contemporary Business Studies Vol: 2, No: 9.September, 2011 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com

International Accounting Standards and Value Relevance of Book value and Earnings: Panel study from Pakistan
Muhammad Azeem
BS. (Acc & Fin) Scholar Department of Commerce Bahauddin Zakariya University, Multan-Pakistan

Rehana Kouser
(PhD Scholar) Department of Commerce Bahauddin Zakariya University, Multan-Pakistan
International Journal of Contemporary Business Studies Vol: 2, No: 9.September, 2011 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com

International Accounting Standards and Value Relevance of Book value and Earnings: Panel study from Pakistan
Muhammad Azeem
BS. (Acc & Fin) Scholar Department of Commerce Bahauddin Zakariya University, Multan-Pakistan

Rehana Kouser
(PhD Scholar) Department of Commerce Bahauddin Zakariya University, Multan-Pakistan

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Published by: Rana Muhammad Azeem on Nov 11, 2011
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International Journal of Contemporary Business StudiesVol: 2, No: 9.September, 2011 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCopyright © 2011. Academy of Knowledge Process
International Accounting Standards andValue Relevance of Book value andEarnings: Panel study from Pakistan
Muhammad Azeem
BS. (Acc & Fin) ScholarDepartment of CommerceBahauddin Zakariya University, Multan-Pakistan
Rehana Kouser
(PhD Scholar)Department of CommerceBahauddin Zakariya University, Multan-Pakistan
ABSTRACT
Study targets to check the impacts of International Accounting Standards (IASs)on the value relevance of accounting information, specifically, Book value(BVPS) and Earnings (EPS).Value relevance, the ability of accountinginformation to explain changes in the share prices (usefulness in stock valuation),is assumed to be affected by change in accounting standards, as evident inliterature. Worldwide increasing importance and adoption of IAS/IFRSs by theEU and other counties in world, in 2005, caused the re-notification for adoption of IASs in Pakistan. Impacts of this adoption (mandatory) are observed on fifty two(52) largest (by market capitalization) non-financial, public limited companieslisted on Karachi Stock Exchange by conducting the regression analysis. Analysisis based on total of eight years financial data (2002-09). Results of statisticalanalyses show that adoption of IASs improved the value relevance of book valueand earnings. The financial information provided in annual report is more relevantin making investment decisions after the adoption of IASs in 2005. Countryrelated factors are seemed to be less affective in case of Pakistan and valuerelevance is higher than find in research studies, conducted in other parts of theworld with similar context.
Keywords:
International Accounting Standards (IASs), Value Relevance, Stock Valuation, Book Value, Earnings, EU, BVPS, EPS, Market Capitalization
JEL classification codes:
G11, G14, G15
INTRODUCTION
Today’s investors have to make investment decisions based on opportunities arising worldwide.Integration of capital markets globally made the uniform accounting framework’s need crucial. This is
 
 
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International Journal of Contemporary Business StudiesVol: 2, No: 9.September, 2011 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCopyright © 2011. Academy of Knowledge Process
difficult and expensive task for an investor to make well-informed investment decisions based ondifferent reporting skeleton. The need of worldwide comparable accounting and reporting standards isgenerated as a result of globalized financial markets (Zarzeski, 1996). On the other hand, it is alsodifficult and expensive for the companies to generate finances from diversified regions by presenting thefinancial information in multiple reporting formats due to higher transaction cost. The rapid growth of thefinancial markets has a big concern to the success of multinational businesses. Changing investor  behavior, along with the other factors, participated to the internationalization of economic activities.Uniformity of accounting standards is also critical in the value relevancy area because they are importantdeterminants of financial reporting quality. Proponents of internationalized financial reporting standardsargue that such diversity reduce the quality and the relevance of accounting information as quoted byPurvis et al. (1991), if all firms follow the same paradigm of accounting and reporting standards externalfinancial reports of firms will offer improved uniform disclosures and more useful accounting informationfor decision making to investors.Research article is divided into six parts. After providing the background in first section “Introduction”,second part “Major Issues in Financial Reporting: Globalization Perspective” discusses the purpose of financial reports, role of accounting standards and affects of globalization on reporting practices. It alsoincludes the emergence and importance of IASs and IFRSs. Value Relevance is explained in the section.It explains the meanings, and types of methods to gauge value relevance. Intervening factors like MarketEfficiency and accounting quality are also discussed. Third Section is “Financial Reporting System of Pakistan”. Section four includes the literature reviewed. Fifth section discusses research methods used inthe study. Six and last part contains the “Empirical Findings and Conclusion”.
MAJOR ISSUES IN FINANCIAL REPORTING: GLOBALIZATION PERSPECTIVE
Financial Reporting is only the process of delivering financial information through the financial reports.These financial reports are called annual reports. Annual reports include the financial statements,disclosures to the financial statements, accounting framework by use of which accounting statements are prepared, and necessary information related to the shareholders. Reporting may be on quarterly basis,semi annually or annually. Normally reports are issued annually, however it depends on the rules andlegal bindings for corporate sector of country. It also varies with type of company either public limited, or  private limited.Basically financial reporting is important for public limited companies. Public limited companies arethose companies which involve the interest of large public. Public limited companies have a lot of sharesissued purchased by general public. These shares are traded on the floor of stock exchanges in thecountry. Public limited companies (PLCs) have the advantage that they can gather a large pool of funds.But the problem here faced by the company is to keep the prices of its share high and stable so that it canattract prospective investors. Financial information is issued through the annual reports. Investors thenanalyses the information and try to estimate expected share price of the company. Original share price isdetermined by the market forces as per its characteristics. However it is possible to determine share priceusing some stock valuation models and statistical technique.
Significance of Accounting Standards
For each profession, there is always a paradigm. Financial reporting also has its own frameworks. It hasaccounting principles, policies and conventions, that are used everywhere and are integral parts of accounting and financial reporting. They are famous with the term of accounting standards.However there is also a space for choices in accounting practices. For guidance on these practices everycountry has its set of accounting rules, these rules are called Generally Accepted Accounting Policies(GAAP). Other requirements are posed normally by the controlling bodies of accounting, stock exchanges
 
 
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International Journal of Contemporary Business StudiesVol: 2, No: 9.September, 2011 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCopyright © 2011. Academy of Knowledge Process
and requirements held by company’s law. So for quality financial reporting company must abide by theserequirements and follow relevant reporting skeleton. At the end company must take a certificate from thecertified accountant that it has followed all the accounting policies, rules and fulfilled relatedrequirements. This certificate is known as the auditor’s report. It is considered as the evidence of goodfinancial reporting.
Globalization and Diverse Financial Reporting Practices
Globalization is very important factor to affect the financial reporting practices. It is the integration of world to solve the problem of scare resources. Like many others, firms (PLCs) too have the opportunitynow to get capital from international markets. They can sale their share to international investors for capital accumulation. No doubt globalization supplies many opportunities to the PLCs but it gives certainchallenges also. The leading advantage of that it provides bigger markets which result bigger profits andultimately leads to greater wealth for further investment, development and reducing poverty in manycountries.In order to ensure smooth functioning of capital markets, the availability of reliable, clear and comparablefinancial information is essential. After globalization, there is a dire need for comparable standards of financial reporting which has become dominant due to the development in number, reach and size of multinational companies, foreign investments, cross-border purchase and sale of securities. But due to thesocial, cultural, legal and economic variances among countries, International accounting standards andtheir practices differ extensively. This is the reason the integrity of financial reports becomes doubtful because the same transactions are accounted and recorded differently in different countries and if we wantto avail the opportunities created by globalization, there must be some common or integrated set of accounting rules which may be accepted worldwide.Increasing trend of investing and borrowings in foreign countries and globalization of businesses andservices required the harmonization of accounting standards. Further need can be clarified with following benefits of harmonization:
 
Harmonization make certain about high quality of financial information disclosed in financialstatements and trustworthiness of information.
 
It plays a vital role in economic and financial development of country in some cases.
 
Multinational companies having subsidiaries in different countries can be compared andevaluated in term of their performances.
 
Meaningful results of performance can be taken for decision making.
 
Harmonization creates international credibility of corporation.
 
Harmonization of accounting standards is a foundation for analyzing international capitalmarkets which may, in result, lessen the cost of capital and therefore the performance of company can be improved.
 
It gives a place where no country can get the advantage or disadvantage of its GAAP.
Emergence and Importance of IAS/IFRSs
After catering the problem of comparability and understandability, results were integrated accounting andfinancial reporting standards. These efforts started with the establishment of IASC (InternationalAccounting Standards Committee) in 1973. The broad objective of the IASC was harmonization of accounting practices through by the h the formulation of accounting standards and to promote their worldwide acceptance.The term IFRS abbreviated for International Financial Reporting Standards is used for the combination of International Accounting Standards and Financial Reporting Standards. These are the integrated set of accounting standards which are adopted all over the world the world. IFRSs are issued by the IASB.However former IASs were issued by the IASC the previous structure of IASB.

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