International Accounting Standards and Value Relevance of Book Value and Earnings: Panel Study From 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
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 accounting information to explain changes in the share prices (usefulness in stock valuation), is assumed to be affected by change in accounting standards, as evident in literature. Worldwide increasing importance and adoption of IAS/IFRSs by the EU 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 companies listed on Karachi Stock Exchange by conducting the regression analysis. Analysis is based on total of eight years financial data (2002-09). Results of statistical analyses show that adoption of IASs improved the value relevance of book value and earnings. The financial information provided in annual report is more relevant in making investment decisions after the adoption of IASs in 2005. Country related factors are seemed to be less affective in case of Pakistan and value relevance is higher than find in research studies, conducted in other parts of the world 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
Todays investors have to make investment decisions based on opportunities arising worldwide. Integration of capital markets globally made the uniform accounting frameworks need crucial. This is
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Copyright 2011. Academy of Knowledge Process
International Journal of Contemporary Business Studies Vol: 2, No: 9.September, 2011 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com
difficult and expensive task for an investor to make well-informed investment decisions based on different reporting skeleton. The need of worldwide comparable accounting and reporting standards is generated as a result of globalized financial markets (Zarzeski, 1996). On the other hand, it is also difficult and expensive for the companies to generate finances from diversified regions by presenting the financial information in multiple reporting formats due to higher transaction cost. The rapid growth of the financial 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 important determinants of financial reporting quality. Proponents of internationalized financial reporting standards argue that such diversity reduce the quality and the relevance of accounting information as quoted by Purvis et al. (1991), if all firms follow the same paradigm of accounting and reporting standards external financial reports of firms will offer improved uniform disclosures and more useful accounting information for 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 also includes 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 Market Efficiency 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 in the 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 and legal 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 are those companies which involve the interest of large public. Public limited companies have a lot of shares issued purchased by general public. These shares are traded on the floor of stock exchanges in the country. 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 can attract prospective investors. Financial information is issued through the annual reports. Investors then analyses the information and try to estimate expected share price of the company. Original share price is determined by the market forces as per its characteristics. However it is possible to determine share price using 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 has accounting 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 every country 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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and requirements held by companys law. So for quality financial reporting company must abide by these requirements and follow relevant reporting skeleton. At the end company must take a certificate from the certified accountant that it has followed all the accounting policies, rules and fulfilled related requirements. This certificate is known as the auditors report. It is considered as the evidence of good financial 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 opportunity now 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 certain challenges also. The leading advantage of that it provides bigger markets which result bigger profits and ultimately leads to greater wealth for further investment, development and reducing poverty in many countries. In order to ensure smooth functioning of capital markets, the availability of reliable, clear and comparable financial 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 the social, cultural, legal and economic variances among countries, International accounting standards and their 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 want to 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 and services 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 financial statements 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 and evaluated 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 capital markets 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 and financial reporting standards. These efforts started with the establishment of IASC (International Accounting 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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The new structure of IASC was accepted by its membership and it was declared as an autonomous body that has trustees and the board. Board members are appointed by the trustees and exercise oversight and increase funds needed but the major responsibility of the board is to set the accounting standards. And this new structure has started its work from January 1, 2001 which is now known as IASB (International Accounting Standards Board). IASBs major job is to create harmonization which give lots of benefits to the investor analysts because it leads towards the similarities and reduce differences in financial statements and this make its comparability feature possible. In this the one report of multinational companies can be used anywhere and they can save their lot of time and efforts which they have spent for making different reports for different countries. Role of stock exchanges as the capital markets is also improved with this harmonization of accounting and reporting standards around the globe. Increasing number of firms listed on the local stock exchanges needs investor protection rules and policies. Another milestone in the integration of capital markets is the establishment of IOSCO (International Organization of Securities Commissions) in mid-2000. This organization like a local securities exchange commission regulates the stock exchanges all over the world. It can be regarded an international regulator of stock exchanges in world as IASB is international body of accounting standards. Harmonization does not finished in itself but it is way to reach toward certain laudable policy goal. The main two benefits were may get from harmonization of accounting standards, first is performance excellence achieved through low transition cost. The other is well known, discussed, and so much needed due to globalization of firms, that is comparability factor for investors, they will be in case to compare the results if they are shareholder of multinational company or associated with parent company which have subsidiary in other country. It will reduce the transaction cost, as some Canadian companies prepare new financial statements in accordance to U.S GAAP also because they have subsidiaries there also, so for government, stock markets and standard setting bodies investors and all stakeholders will get relief in harmonization of accounting standards around the world.
Value Relevance of Accounting Information

Value relevance is the ability of financial information to predict share prices. While using the fundamental analysis, it requires that the data used must have some explanatory power. This explanatory power to predict market value is defined as value relevance. The term value relevance is used now a days widely, for financial reporting standards, accounting variables, spending on intangibles etc. The issue of value relevancy is very old in the literature of accounting and financial reporting. In early 90s the notion was raised that information being reported by companies is becoming less relevant for investors. There are many models developed by scholars to determine the value relevancy. R-squared is most traditional tool to check the relevance of an accounting variable to the market price of shares. This value relevance is measured in many ways; however there are three major types. This classification is used by many e.g., Lambert (1996) and Holthausen and Watts (2001). Relative association Incremental association Marginal information content Relative association studies find the value relevance in two different accounting paradigms. Usually higher R-squared is categorized as more value relevant. Second type is the use of a set of some financial numbers in the regression analysis to predict share prices and than if regression coefficient is significantly different than zero, it is assumed that these variables are value relevant. Third Marginal information content technique finds that how much increase in information available to the investors comes by adding another accounting measure.
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FINANCIAL REPORTING STRUCTURE IN PAKISTAN

Accounting has very old roots in the sub-continent. Gladwin (1796) shown that, in 1583 there was a Hindu method of accounting before the adoption of Persian mode in Indo Pak. Hamiltons (1798) argues that Hindu method of accounting used by Bengali traders was a double entry system. After the emergence of Pakistan in 1952 as a first walk toward the institutional development of the accounting profession, the practicing accountants back then called registered accountants formed a private body known as the Pakistan Institute of Accountants (PIA). In Pakistan parts of the reporting system are stock exchanges, professional bodies for accounting, corporate law, and accounting standards framework. We explained all of these parts step by step. On emergence of Pakistan in 1947, it received a falling down economy made of a prevalence of agriculture, disordered transport system, huge immigrant troubles, deprived industrial legacy, undeveloped banking and financial system, and negligible electricity. In view of its unstable economic conditions, the country was said to be Economic wreck and troubles and darkness was expected for newly formed state. But Pakistan did survive at this stage and goes for economic development way by working hard by its nation. In June 1959, the accountancy departments were formed to deal with the profession of accounting in ministry of commerce instead of section officer. Consultative council was established known as council of accountancy under auditors certificates rules 1950 as well this period and suggested the formation of ICAP later in Pakistan. Major institutions developed by the government of Pakistan and those established at the international level affected the patterns of financial reporting in Pakistan. In Pakistan bodies which regulated the accounting and reporting practices are following: ICAP (Institute of Chartered Accountants Pakistan) SECP (Securities and Exchange Commission of Pakistan) Karachi Stock Exchange, Islamabad Stock Exchange, and Lahore Stock Exchange State Bank of Pakistan Companies Ordinance 1984 Code of Corporate Governance In Pakistan the concept of accounting and reporting rules started with the emergence of ICAP, as it was the only body to regulate accounting in the country. In the absence of any standards and defined rules, ICAP issued its ATRs which are used for financial reporting as GAAP till now. ICAP council issued some ATRs (Technical Releases) on some specific issues for defined financial reporting practices. ICAP had its circulars regarding all proceedings made by it, and these ATRs are also issued with reference of these circulars. These circulars along with these ATRs worked as the interpretations of the accounting practices. There are thirty one TRs in total. Nineteen of them have been withdrawn. Rest twelve is effective till now. These TRs are complement to the accounting and reporting standards being followed with the passage of time. IASs in Pakistan: Adoption Paradox There is the contradiction on the issue of adoption of international accounting standards IAS). Pakistan (ICAP) became the member of the IASC in 1974 it started to recommend the IASs issued by the IASC from 1986. This was the first time adoption of accounting standards. But this adoption was casual one due to following reasons: Only some of the companies adopted them at that time Changes were made in these standards by ICAP required for local situation and needs Interpretation and many time explanations were issued for these standards for the understandability
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We termed this adoption of IASs as the voluntary adoption as it occurred in other countries of world too. But with the increased popularity, need and adoption by super powers, in 2005, EU issued the notification for the adoption of IFRS (new set issued continued after IASs), Pakistan (SECP) also issued a SRO 665(1)/2005 to re-notify the adoption of IASs adopted. The term adoption is very much difficult to explain in this context. The first time adoption of IASs was recommended by the SECP in 1986 vide its S.R.O. 777(1)/86 on Aug 6, 1986. However it is difficult to describe when mandatory adoption began. Then later SROs were issued by SECP to notify the adoption of other IASs in Pakistan, as issued gradually by IASB. The adoption was not from a single date. However the SECP in 2005 issued S.R.O. 665 (1)/2005 in exercise of the powers conferred by sub section (3) of Section 234 of the Companies Ordinance, 1984 on June 28, 2005. In this SRO, SECP withdrawn its SROs issued from 1986 to 2004, and notified the thirty one (31) IASs to be followed in preparation of financial statements. IAS were: 1, 2, 7, 8, 10, 11, 12, 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 26, 27, 28, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, and 40. In this way gradually all the IAS/IFRSs issued by the IASB have been notified by SECP through different notifications. The date of notification issued by SECP and the effective date are different. According to the ICAPs schedule of effective dates for revised and/or reformatted IAS/IFRSs only one standard is effective since 1984, one since 1994, one since 1988, two since 1995, one since 1998, three in 1999, 13 in 2005, and of total 38 IAS/IFRSs. We referred this adoption as mandatory adoption, as EU and U.S. announced it the mandatory adoption.
Our study is solemnly based on this classification of adoption. We conducted the statistical analysis on the pre and post adoption basis, by assuming the mandatory adoption which got effective from 1st July, the start of fiscal year, in 2005.
LITERATURE REVIEW
During the last two decades the area of value relevancy acquired the larger attention and was addressed by lot of research studies. This huge concentration was the result of beliefs emerged during 1990s that the accounting information is becoming less value relevant. The first phase of studies conducted during the
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1990s attends to check the reasons of decreasing value relevancy and measures to improve it. Later studies concentrated on the effects of IAS/IFRS adoption on the value relevancy which began in 2005. Value-relevance entails the ability of the financial information enclosed in the financial reports to explain the stock market measures; Vishnani & Shah (2008). Following given is the literature reviewed on the value relevance of numbers and IAS/IFRS adoption.
Need for Harmonization of Reporting Standards

People who are in the favor of harmonized IAS claim that the same treatment or single set of rules for all the countries will ensure the similar treatment of transactions by all the companies of different countries throughout the world. Nevertheless, the academic research challenge that how a single set of accounting standards can be applied throughout the world who has countries with different political, social, and economic environment. However, previous studies on IAS discoveries those firms are not compliant in meeting even the easily noticeable disclosure requirements (Street and Gray 2001). Moreover, studies of the properties of accounting output find that similar standards are applied very in a different way around the world (Ball, Robin and Wu 2003). But many studies findings prove that the its better to have same Accounting standards instead of having different because it will help the global comparability of financial information. Specifically, most authors point to either regulatory oversight or capital market pressures (Land and Lang 2002, Ball, Robin and Wu 2003, Burgstahler, Hail and Leuz 2006). Supporters of harmonized international accounting standards argue that if all organizations use similar accounting standards in their financial reporting, financial statements of business would be more standardize and consistent disclosure and more helpful information to decision maker (e.g., Purvis et al, 1991). Literature shows that complicated institutional elements effects financial reporting quality (e.g., Ball, 2001).
Impacts of IAS/IFRS Adoption

Financial decisions and estimation of firms future financial performance is given to investors transparent by IFRS (Street and Bryant, 2000) previous literature shows improvement due to adopting IFRS in accounting quality of publicly traded European companies (E.g. Daske and Gebhardt, 2006; Barth et al., 2008). Therefore, IFRS adoption is likely to reduce exploitation in earnings and improve stock market efficiency (Kasznik, 1999; Lenz, 2003). IFRS adoption is likely to develop transparency; disclosure and comparability (Biddle and Saudagaran, 1989). The adoption of IFRS would shrink asymmetric information consequently smooth the communication among the management, investors, and other stakeholders (Bushman and Smith, 2001) and that will result in reduction of agency cost (Healy and Palepu, 2001) from this (El-Gazzar et al, 1999; Botosan and Plumlee, 2002) says that decreasing asymmetric information will lead to reduction in cost of equity and cost of debt. After then it is again confirmed by Leuz and Verrecchia, (2000), they said that there are proofs of IFRS adoption that leads to reinforces stock market liquidity and direct us to reduction in cost of capital, sot of transactions higher market value and better reputation. Adoption of IFRS is also likely to impact positively on stock returns of company and stock relevant to financial performance measures (Guidry et al, 1999; Chung et al, 2002). Most of academics of accounting recommended that IAS (International Accounting Standards) are considered more value relevant than GAAP prevailing domestic, high quality accounting standards and its significant predictability (Harris and Muller, 1999; Davis-Friday and Rueschoff, 1999; Lenz, 2003; Bao and Chow, 1999) previous studies presents that code law countries, like European counties, where funds supplied by state, banks or families likely to more crucial than in common law countries like North America, where capital is supplied by private investors (La Porta et al., 1997) therefore those counties which have strong investor protection system like UK, the IFRS adoption cost is likely to be less than due
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to lever of earnings management is less as management is lower inclined to control the reported figures of accounting (Nenova, 2003; Dyck and Zingales, 2004; Renders and Gaeremynck, 2007). On other hand those countries which have comparative weak investor protection system, the financial reporting quality will be reduced because of more earnings management scope, reflecting the higher cost of IRS adoption (Ali and Hwang, 2000; Hung 2001).
Evidence from studies on Reconciliation of Annual Reports from two different Accounting Setups
Harris and Muller (1999), using 31 companies, reconciled IFRS-US GAAP annual reports between 1992 1996 using Multiple linear regression (Earnings and Ohlson models). They found that reconciliations are value-relevant; IFRS are more closely associated with prices-per-share than US GAAP, but US GAAP is more closely associated with returns than IFRS. Bartov et al. (2005), reconciled annual reports of 417 companies (US GAAP, German GAAP and IFRS) from, 1998 to 2000; used linear regression. They found that US GAAP and IFRS are more value relevant than German GAAP. Lin and Chen (2005) reconciled annual reports of 415 companies (reconciliation of Chinese GAAP and IFRS) for 19952000 using multiple linear regressions (Earnings and Ohlson model). They found Chinese GAAP more value relevant than IFRS. Schiebel (2006) reconciled annual reports of 12 German companies (GAAP and IFRS) from 2000 to 2004 using linear and exponential regression (panel data). He found German GAAP more value relevant than IFRS. Niskanen et al. (2000) reconciled annual reports of 18 companies (reconciliation of Finnish GAAP and IFRS) for a period of 19841992 using multiple linear regressions (Earnings model). However, they found that reconciliations do not appear to be value-relevant. Ahmed and Goodwin (2006) analyzed the effect of adoption of IFRS in Australia. They found that IFRS earnings are higher than AGAAP earnings whereas AIFRS equity is lower than AGAAP equity, and more firms have earnings decreases than increases. The effect on ratios is most significant for leverage where the AIFRS ratio is higher than AGAAP ratio. They also found that AGAAP reported financial information is more value relevant compared to AIFRS reported financial information.
Contradictory Views from Value relevance Researches

Inspite of large evidence on the relevance of accounting information in share price determination, criticism also exist on this issue. Critics dont condemn on the relevance of all the accounting numbers but book value of equity and earnings. Barth (2000) includes the literature on criticism. This challenged the use of the variables discussed above in standard setting process. These researchers argue that standard setting can be improved with the extent to which accounting deals with the equity valuation.
Related previous studies in Pakistan

In Pakistan, there is weak or no background for the value relevance and IAS/IFRS researches. To our knowledge, no study for testing value relevance of accounting information is conducted yet. Even no study on the impacts of IFRS/IAS adoption is there. However there are some studies conducted on the accounting developments, like Ashraf and Ghani (2005). This study did not include the empirical and econometrical analysis. Except this study a recently published study of Malik (2011) addressed the value relevance of accounting information among major fundamentals in Pakistan. However it doesnt consider impacts of IASs adoption by Pakistan. Use of accounting information for stock valuation as a model is also not included in the study. It concluded that there earnings has highest statistical relationship with share price.
Inferences Drawn from available Literature

The researches included, provide sufficient support for the current research in context of Pakistan. These researches show that still there many conflicts, and contradictions. Ali and Hawang (2000) argued that value relevance of accounting information is determined by country factors. So this study can find whether the Pakistan, a developing country, with less involvement of private sector in standard setting, has value relevant financial information. There is no previous research for this issue. Results of previous
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studies are conflicting and generate the need for further studies. So keeping all these facts in view, we recommend this study to be conducted. The fact of less or no well defined body of knowledge related to the impacts of IAS/IFRSs in Pakistan encourages researcher.
RESEARCH METHODOLOGY
The study has three variables, two independent and one dependent variable. Independent variables are Earnings and Book value. The dependent variable is Market Value. Share price is taken for the companies after three months of the financial year end. Book Value was calculated as total equity of the firm less preference equity divided by the total numbers of shares outstanding. EPS is the simply earnings for per share outstanding, calculated as net income available for ordinary shareholders divided by numbers of ordinary shares outstanding. Variables are selected on the basis of literature reviewed, Kadri, Aziz and Mohamed, (2009); Callao, Jarne and Lainez (2007); Gaston, et al. (2010) and many others also commented that these variables are best used in technical analysis due to more explanatory power for market value of shares. Using BVPS and EPS for testing value relevance is a natural place to look for the impact of accounting standards on reporting quality. Following hypotheses are formulated to test statistically: a. MVPS is significantly determined by the BVPS and EPS for whole study period data. b. MVPS is significantly determined by the BVPS and EPS for before adoption study period data. c. MVPS is determined represented by the BVPS and EPS for after adoption study period data. Based on the previous literature and variables under study following hypothesis are designed. These hypotheses can be categorized in the following way: To draw the inference about the impact of IAS/IFRSs adoption on value relevance of financial information (BVPS and EPS) the study used a systematic way of sampling. Sampling is based on the market capitalization of firms at the day of analysis. We determine the weights of each sectors capitalization towards the total economy. Then arrange the companies within a sector on the basis of their proportionate market capitalization. Companies are selected from a sector on the basis of the proportion of that sector to total economy. In this way fifty two (52) largest companies are included in the analysis. Required data was collected from the annual reports of the companies and the balance sheet analysis reports for joint stock companies issued by the State Bank of Pakistan. Directives of the SECP and ICAP were also be used. KSE website was used to gather market prices of shares for three months later the financial years. The data will be processed and analyzed through any statistical package e.g. SPSS and Minitab. Regression test will be performed to infer the impact of IASs adoption on value relevance of book value and earnings. Regression analysis will be conducted at three levels, first for whole study period, second for before adoption and third for after adoption. Evidences show that 42% of total IAS/IFRSs are adopted by ICAP in 2005. So the results of three stage regression analysis will be compared to check whether IASs adoption in 2005 affected the value relevancy of financial information of selected PLCs. In this regard a pre (2002-04) and post (2005-09) analysis is conducted. In study we conducted the analysis for 8 years data. 4 Years are treated before period and 4 years are after period. Detail is provided in the following table. We used the Ohlson (1995) to investigate the impact of IAS adoption on value relevance of BVPS and EPS. The model can be illustrated using a linear function: MVPS = a + b1 [BVPS] + b2 [EPS]
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Eq. 1
Where MVPS is Market value, BVPS is Book Value, EPS is earnings, a is constant and b is the slope. Following statistical techniques are used to test our hypothesis: OLS (Ordinary Least Squares) Regression for simple firm-year data Panel Data Regression (Fixed Effects) for firms included in analysis
EMPIRICAL FINDINGS AND CONCLUSIONS

Hypotheses are tested at two stages. At first regression analysis is conducted through the Excel using firm-years data. Then in second step same analysis is conducted through Gretl using panel data approach. Regression tests are performed to identify the relationship between dependent variable and independent variables. Book value and earnings are said to be value relevant if the relationship between market value, book value and earnings are significant. Book value and earnings are not value relevant if the relationship with market value is not significant. A few tools are used to measure the relationship between market value, book value and earnings. First, R is used to find the correlation between market value and book value. Second, R2 indicates how many percent of the variation in dependent variable is explained by independent variables. Third, adjusted R2 measures the goodness of model fit. In addition, p-value is used to measure whether individual independent variables are significant or not, a p-value of 0.05 and below shows that individual independent variable is significant.
OLS Regression
For the hypothesis i, MVPS is significantly determined by the BVPS and EPS for whole study period data following summary and outputs are given by Excel:
Table 1: OLS Regression Results for overall study period Multiple R 0.67 R Square 0.45 Adjusted R Square 0.45 P-value of BVPS 0.00 P-value of EPS 0.00 Equation MVPS = 35.4 + 0.390 BVPS + 5.42 EPS
Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2 value shows that there is the significant value relevancy in the amounts for BVPS and EPS during whole study period by using 8 years data. So we accept our hypothesis i. P-value is below than 0.05 and R2 value also shows the model fitness. For the hypothesis ii, MVPS is significantly determined by the BVPS and EPS for before adoption study period data, following summary and outputs are given by Excel:
Table 2: OLS Regression Results for before adoption period Multiple R 0.64 R Square 0.41 Adjusted R Square 0.40 P-value of BVPS 0.00 P-value of EPS 0.00 Equation MVPS = 28.0 + 0.470 BVPS + 5.78 EPS
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Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2 value shows that there is the significant value relevancy in the amounts for BVPS and EPS during before adoption period by using 4 years data. So we accept our hypothesis ii. P-value is below than 0.05 and R2 value also shows the model fitness. For the hypothesis iii, MVPS is determined represented by the BVPS and EPS for after adoption study period data, following summary and outputs are given by Excel:
Table 3: OLS Regression Results for after adoption period Multiple R 0.74 R Square 0.55 Adjusted R Square 0.55 P-value of BVPS 0.89 P-value of EPS 0.00 Equation MVPS = 33.4 + 0.018 BVPS + 8.44 EPS
Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2 and adjusted R2 value shows that there is the significant value relevancy in the amounts for BVPS and EPS during after adoption period by using 4 years data. So we accept our hypothesis iii. P-value is below than 0.05 and R2 value also shows the model fitness. As per regression analysis using firm-years data we can make some inference for our hypotheses, degree of determination for the fitted model is greater during after adoption period. Adjusted R-square is 40.44 % for before adoption period, its 55.09 % for after adoption period. So we conclude that value relevance has increased after the adoption of selected international accounting standards.
Panel data Regression, Fixed Effects Model (FE)

Same hypothesis are tested again by using a more sophisticated technique named as Panel regression. The simple difference between the OLS (Ordinary Least squares) regression and panel regression stands in data orientation used. OLS uses the data as cross sectional. However the observations are taken by the panel regression are considered for cross sectional plus time series at the same time. By using panel regression, software is able to differentiate between the values of one cross sectional unit to other. In this way analysis yields the overall relationship between the variables on both the dimensions. Panel regression technique is divided into normally three types. These three types include Fixed Effects Model, Random Effects Model, and Pooled OLS, which is usually referred as LSDV (Least Squares Dummy Variable Analysis). We chose the FE model for our research. This model is used to generalize the effects on the given sample units. It is also used to control unobserved heterogeneity. For the hypothesis vii, MVPS is significantly determined by the BVPS and EPS for whole study period data following summary and outputs are given:
Table 4: Panel Regression (FE Model) Results for whole study period
R-squared Adjusted R-squared P-value of BVPS P-value of EPS Equation
0.73 0.69 0.00 0.00 MVPS = 80.3588 + 0.347256BVPS + 3.02193EPS
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Table shows that whole study period data has significant value relevancy in the BVPS and EPS figures. However it should be noted that there is improved result for R-squared and Adjusted R-squared after using the panel approach (fixed effects model). So we dont reject our hypothesis i. For the hypothesis ii, MVPS is significantly determined by the BVPS and EPS for before adoption study period data, following summary and outputs are:
Table 5: Panel Regression (FE Model) Results for before adoption study period R-squared 0.80 Adjusted R-squared 0.73 P-value of BVPS 0.00 P-value of EPS 0.14 Equation MVPS = 27.1298 + 1.14829 BVPS + 0.412995 EPS
Table shows that before adoption study period data has significant value relevancy in the BVPS and EPS figures. However it should be noted that there is improved result for R-squared and Adjusted R-squared after using the panel approach (fixed effects model). So we dont reject our hypothesis ii. For the hypothesis iii, MVPS is significantly determined by the BVPS and EPS for before adoption study period data, following summary and outputs are:
Table 6: Panel Regression (FE Model) Results for after adoption study period R-squared 0.91 Adjusted R-squared 0.88 P-value of BVPS 0.73 P-value of EPS 0.00 Equation MVPS = 149.383+0.0305345 BVPS+2.89566 EPS
Table shows that after adoption period data has significant value relevancy in the BVPS and EPS figures. However it should be noted that there is improved result for R-squared and Adjusted R-squared after using the panel approach (fixed effects model). So we dont reject our hypothesis iii. On the basis of overall panel regression can infer that degree of determination for the fitted model is greater during after adoption period. Above tables show that value relevancy is higher during after adoption period data. Adjusted R-squared is higher for after adoption period (87.51%) than before adoption period (72.88%).
CONCLUSIONS
Research on value relevance of accounting numbers is not new. The application of the model to see the effects of IFRS/IAS on value relevance of accounting numbers is not also new. However the research on the effect of IFRS/IAS on accounting numbers in Pakistan is still new. Current study investigates the effect of adoption of IFRS/IAS on value relevance of book value and earnings of Pakistani PLCs under two different situations. Based on the results of the study a few conclusions can be made: First, it shows that book value and earnings of selected Pakistans PLCs are value relevant throughout the period under study. Second, the results also show that book value and earnings of firms are more value relevant during the IFRS/IAS adoption period than before mandatory adoption period. This might be due to the introduction of fair value related new reporting standards. Third, this study has proven that in the short run the introduction of IFRS/IAS leads to narrower gap between market and book value.
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Fourth, the financial information provided in annual report is more relevant in making investment decision. Country related factors as discussed by the Ali and Hawang (2007) are seemed to be less affecting in context of Pakistan. IAS adoption is beneficial for investors and analysts of fundamental analysis, by providing value relevant financial information. ICAP should continue to adopt the standards issued by the IASB. All the newly issued IFRSs should also be adopted soon. ICAP should also facilitate the adoption process and make it sure that adoption is being made at once. Implementation guidance would increase the quality of financial reporting in the corporate sector of Pakistan.
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67
14
401
69
X1: Companies that remained listed during whole study period, X2: Companies not having Data for Independent Variables, X3: Companies Qualified for Sampling, X4: Proportion of Sector toward Total Market Capitalization, X5: No. of Companies Selected, X6: Multiplier for margin, X7: No. of Sample companies from each sector, X8: Companies for which Market Values are not available, X9: Companies included in the analysis.
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Appendix 2: List of Companies included in the Analysis Gul Ahmed Textile Mills Ltd. Indus Dyeing & Manufacturing Co. Ltd. Nishat (Chunian) Ltd. Sapphire Fibres Ltd. Sapphire Textile Mills Ltd. Artistic Denim Mills Ltd. Fazal Cloth Mills Ltd. Fazal Textile Mills Ltd. Gadoon Textile Mills Ltd. Masood Textile Mills Ltd. Quetta Textile Mills Ltd. Mahmood Textile Mills Ltd. Abbott Lab. (Pakistan) Ltd. Dawood Hercules Chemicals Ltd. GlaxoSmithKline Pakistan Ltd. ICI Pakistan Ltd. Engro Corporation Limited (Engro Cheml Pakistan Ltd.) Ferozsons Laboratories Ltd. Searle Pakistan Ltd. Sitara Chemical Industries Ltd. Al-Ghazi Tractors Ltd. Indus Motor Company Ltd. Millat Tractors Ltd. International Industries Ltd. Atlas Honda Ltd. Siemens Pakistan Engineering Co. Ltd. JDW Sugar Mills Ltd. Lucky Cement D.G Khan Cement Company Ltd. Karachi Electric Supply Company Ltd. National Refinery Ltd. Sui Southern Gas Company Ltd. Mari Gas Co. Ltd. Kohinoor Energy Ltd. Altern Energy Ltd. Bata Pakistan Ltd. Ghani Glass Ltd. Ismail Industries Ltd. National Foods Ltd. Nestle Pakistan Ltd. Pakistan Services Ltd. Rafhan Maize Products Co. Ltd. Treet Corporation Ltd. Tri-Pack Films Ltd. Service Industries Ltd. Murree Brewery Company Ltd. Shifa International Hospital Ltd. Gillette Pakistan Ltd.
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Shezan International Ltd. Shabbir Tiles and Ceramics Ltd. Clover Pakistan Ltd. Mitchell's Fruit Farms Ltd.
Appendix 3: S.R.O. 665(1)/2005
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International Accounting Standards and Value Relevance of Book Value and Earnings: Panel Study From Pakistan

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

MAJOR ISSUES IN FINANCIAL REPORTING: GLOBALIZATION PERSPECTIVE

Significance of Accounting Standards

Globalization and Diverse Financial Reporting Practices

Emergence and Importance of IAS/IFRSs

Value Relevance of Accounting Information

FINANCIAL REPORTING STRUCTURE IN PAKISTAN

Need for Harmonization of Reporting Standards

Impacts of IAS/IFRS Adoption

Contradictory Views from Value relevance Researches

Related previous studies in Pakistan

Inferences Drawn from available Literature

EMPIRICAL FINDINGS AND CONCLUSIONS

Copyright 2011. Academy of Knowledge Process

Panel data Regression, Fixed Effects Model (FE)

R-squared Adjusted R-squared P-value of BVPS P-value of EPS Equation

0.73 0.69 0.00 0.00 MVPS = 80.3588 + 0.347256BVPS + 3.02193EPS

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Copyright 2011. Academy of Knowledge Process

Appendix 3: S.R.O. 665(1)/2005

Copyright 2011. Academy of Knowledge Process

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