Journal of Accounting in Emerging Economies

IFRS Convergence and Revisions: Value Relevance of Accounting Information from East Africa
Erick Rading Outa, Peterson Ozili, Paul Eisenberg,
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Erick Rading Outa, Peterson Ozili, Paul Eisenberg, "IFRS Convergence and Revisions: Value Relevance of Accounting
Information from East Africa", Journal of Accounting in Emerging Economies, https://doi.org/10.1108/JAEE-11-2014-0062
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 IFRS Convergence and Revisions: Value Relevance of Accounting Information from East
Africa
Abstract
Purpose: The purpose of this study is to examine the relative value relevance of accounting

information arising from the adoption of converged and revised IAS/IFRS in East Africa.

Design: The research applies “same firm year” design for identification of the effects of changes

in accounting standards. A model similar to Ohlson’s price model and random effects GLS are

used to estimate R2 of the regressions of share prices on book values and earnings.
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Findings: The results show that accounting information prepared from revised and converged

IAS\IFRS display higher value relevance and also increased following the revision and

convergence of IAS\IFRS. Our cross product term is more significant in the post

revision\convergence period thus providing further evidence for increased value relevance after

the revision of IAS/IFRS standards. Our results are robust to various models and show that value

relevance in East Africa is relatively lower than that of the developed markets.

Originality\Value: The current study provides empirical evidence that value relevance increases

with converged/revised IAS/IFRS based on quasi natural experimental setting in East Africa. We

also extend the debate on whether value relevance is relevant in emerging markets, which are

regarded as imperfect markets with few regulations, weak enforcement and limited sources of

information. Our results may be useful to accounting preparers, regulators, investors, standard

setters and countries seeking to adopt IAS/IFRS in developing countries.

JEL classification: G14, G15, G30, M41, M42.

Acknowledgments:

The authors wish to thank the participants of the 5th African Accounting and Finance Association
conference at the University of Mauritius for their helpful comments on the various sections of
the paper. We also thank Prof Elmar Venter of the University of Pretoria for the special attention

Page 1 of 27
 he gave the paper. We appreciate insightful comments and suggestions from two anonymous
reviewers.

Key Words: IFRS\IAS, Value Relevance, Accounting Information, Converged\Revised IFRS,

Ohlson Model, East Africa

1. Introduction

This paper examines the value relevance of accounting information arising from
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converged/revised International Accounting Standards (IAS)/International Financial Reporting

Standards (IFRS) for a sample of companies listed in East Africa for the period 2005 to 2014.

Value relevance is an important topic in capital market research because it examines whether the

financial statements that companies produce provide investors and other users with both high-

quality and valuable accounting information that enable them to make informed decisions. This

is crucial to East Africa and other developing countries where capital is scarce and investment

risk is relatively high and there is need to attract more investment.

Value relevance has been studied in many perspectives. The existing literature does not

present an unequivocal view as to whether the value relevance of accounting information

increases or deteriorates due to the usage of IAS/IFRS, which are perceived to be of high quality

by standard setters. Barth, Landsman & Lang (2008) find in a cross-country study for the period

1990 to 2004 that the accounting quality of IAS is lower than that of US GAAP, but is higher

than those of domestic GAAP from other countries. The study was based on IAS and not on

IFRS that emerged from 2002 onwards. Clarkson, Hanna, Richardson, & Thompson (2011) show

“no change” in value relevance when comparing local GAAP to IFRS in a large sample study of

firms from 15 countries in Europe and Australia. Palea (2013) confirms that the question of IFRS

Page 2 of 27
 improving quality of financial reporting has not been completely addressed with specific

references to their mandatory adoption in Europe. Okafor, Anderson & Warsame (2016) find that

financial statements prepared under IAS/IFRS exhibit higher value relevance for share price and

return models than accounting information prepared previously under the local GAAP in

Canada. In contrast to Okafor et al. (2016), Cormier & Magnan (2016) show that the adoption of

IAS/IFRS enhances the comparability of financial statements in Canada but the effect is

concentrated among firms that are cross-listed in the U.S.

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In the context of developing countries, Khanagha (2011) finds a decline in value

relevance of accounting information following IAS/IFRS adoption in the United Arab Emirates

(UAE). Ngole (2012), using a large sample from six capital markets from Africa, concludes that

IAS/IFRS does not improve financial reporting. Ames (2013) did not find that IAS/IFRS

adoption improves value relevance in South Africa. Garanina & Kormiltseva (2014) did not find

any value relevance in Russia following IFRS adoption. According to these studies, IAS/IFRS

struggles to achieve one of its main goals, namely to improve accounting informativeness. On

the other hand, studies conducted by Chamisa, Mangena & Yee (2012) and Lee, Walker & Zeng

(2013) show that IAS/IFRS increases the value relevance of accounting information compared to

Chinese accounting standards (CAS).However, both studies question how converged\revised

IAS\IFRS can favorably impact financial reporting in emerging markets whose institutional

features such as market regulation, enforcement and investor protection are deemed to be weak.

In Africa, capital market attributes are described as fragmented, relatively small and

illiquid (Smith, Jefferis & Ryoo, 2002). Also, IAS/IFRS enforcement mechanisms are considered

to be inadequate (Anandarajan & Hasan, 2010; ROSC, 2010; Daske, Hail, Leuz, & Verdi, 2013).

These attributes in East Africa severely affect informational efficiency (efficient market assumes

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 that pricing reflects available information) and constrains the effectiveness of IFRS given that

IFRS are fair value based and work best in liquid and active markets (Ball, 2006). It is therefore

unclear how useful IFRS can be in a market that is considered to be illiquid, as is the case for the

East African capital markets. To date, the value relevance of IFRS financial statements remains

unclear.

In addition to the discussions above, the current East African paper is motivated by scant

evidence on the value relevance of accounting information in the post-IAS/IFRS period. For
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example, Anandarajan & Hasan (2010) show the firms that adopt IFRS have higher value

relevance than firms which adhere to local standards in Middle Eastern and North African

(MENA) countries. While accounting information appears to be more value-relevant in firms in

the MENA region, there are inadequate studies on value-relevance in East, West and South

Africa that shows how IFRS/IAS revision affects the value relevance of accounting information.

We seek to fill this gap for the case of East Africa. We contribute to the value-relevance

literature by investigating whether accounting information is value-relevant among firms in East

Africa particularly after IAS/IFRS convergence and revision, in order to provide some insights

on the reliability and/or relevance of accounting information in East Africa.

The research objective is to examine the value relevance of accounting information based

on converged/revised IAS/IFRS. The current study seeks to answer the following research

questions: Are equity book values and earnings based on converged/revised IAS/IFRS related to

the share prices? Does the explanatory power of the earnings and equity book values increase in

the post convergence period? Which of these two indicators is more value relevant – equity book

values or earnings?

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 To answer these research questions and to address the research objective, the study is

conducted in an East Africa setting. East Africa provides a natural quasi-experimental setting

that mitigates the problems of measuring the effects of IFRS adoption in the EU and other

environments. Such problems include many standards in operation (US GAAP, IFRS, local and

other legacy systems) and common law versus code law effects. Besides, East Africa has a

longer history of IAS/IFRS implementation and resolution of issues based on global practices

with the oversight of the International Federation of Accountants (IFAC) and other stakeholders.
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We are therefore able to use long periods of the old IAS/IFRS and sufficiently long periods of

post convergence to produce robust comparison.

The current study collects data from Nairobi Securities Exchange (NSE) representing the

main traded securities in East Africa. The results show a significant positive relationship between

share prices and earnings and equity book values and an increase in R2 in the post revision and

convergence period. Our study therefore contributes to the literature by comparing value

relevance based on revised\converged standards and non IFRS\IAS converged standards using a

developing country data. The longitudinal approach we adopt allows us to detect the time-series

behaviour of accounting information during the non-revised/non-converged IAS/IFRS regime

and during converged/revised IAS/IFRS period. Our study extends the debate on whether value

relevance is relevant in emerging countries given their imperfect market, few regulations, weak

enforcement and limited sources of information .We also contribute to the literature comparing

value relevance of earnings and equity book values. We confirm the view by Ball (2006) and

Leuz & Wysocki (2008) that mandatory IFRS adoption can provide economic benefits to firms

in low enforcement countries. These findings are important for accounting preparers, regulators,

investors, standard setters and other users interested in the East African capital markets.

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 The rest of the paper is organized as follows. Section 2 reviews the conceptual

framework, institutional set up, literature and the hypotheses while Section 3 discusses the

research design. Section 4 represents the results and section 5 concludes the paper.

2. Conceptual Framework, Institutional Set Up, Literature Review and Hypotheses

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2.1 Conceptual Framework

Leuz and Wysocki (2008) use the term “New Institutional Accounting” to describe

research on the interaction between market forces, legal/regulatory systems, enforcement

provisions and other institutional activities that influence quality of financial reporting and

disclosures. The financial reporting quality in East Africa therefore depends on the adopted

IFRS, financial reporting incentives and the region’s institutional set ups. In our conceptual

framework, financial reporting incentives and changing institutions are held constant while we

take IFRS as a time-varying variable; we can isolate capital market effects due to changes in

IFRS thus solving the problem of identification.

2.2 Institutional set up of Accounting in East Africa

The first East African Community was founded in 1967 by Kenya, Uganda and Tanzania

and was one of the oldest and most prosperous Regional Economic Communities (RECs) in the

world prior to its collapse in 1977. The Treaty for Establishment of the East African Community

was signed in 1999 and entered into force in 2000 (EAC, 2015). Rwanda and Burundi became

full members in 2007. The regional integration process is still ongoing. Therefore, there are

many institutional similarities within the region.

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 The institutional framework of accounting in East Africa is made up of the statutory

framework of accounting which defines the professional accounting institutes and the

examinations for qualifying accountants. In the three countries, accounting is a self-regulating

profession and sets the standards, registration and disciplinary process while working with

accounting standard setters globally. In these countries, the company’s law creates the statutory

framework governing financial reporting. Furthermore, there are industry-specific laws such as

the Capital Market Authority Act (CMA) for listed companies and the Banking Act for banks.
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The Council of the Institute of Certified Public Accountants of Kenya (ICPAK) adopted the

IAS\IFRS as the accounting standard in Kenya back in 1999. ROSC (2010) reports substantial

progress on IAS/IFRS implementation in spite of ongoing challenges. In Uganda, IAS\IFRS was

also adopted in 1998 by the Council of the Institute of Certified Public Accountants of Uganda

(ICPAU) as the national standard. ROSC (2014) report on Uganda identifies some improvements

in compliance but also highlight some challenges. The National Board of Accountants and

Auditors (NBAA) of Tanzania issued a technical pronouncement which made IAS/IFRS

mandatory with effect from 1st July 2004. In Rwanda, the Institute of Certified Public

Accountants of Rwanda (ICPAR) was established under the Companies Act 2009 and require all

companies to use IAS/IFRS. However, there is evidence that this region was using IAS/IFRS

already before these pronouncements.

The East African market can be viewed as a common law market. From the accounting

point of view, the key feature of common law is its strong focus on shareholders as opposed to

code law that focuses on low disclosures and accounting for tax. Prather- Kinsey, Jermakowicz

and Vongphanith (2008) argue that under codel law, creation of shareholder value is

subordinated to the needs of other stakeholders, mainly insiders, who can utilize tax

Page 7 of 27
 minimization techniques or reserve accounting in order to reduce earnings volatility. This raises

the argument that common law markets would benefit less from the adoption of

converged/revised IAS/IFRS because financial reporting has historically supported the

shareholder. It may, therefore, be predicted that the quality of accounting information would not

improve much in common law countries following adoption of converged/revised IAS/IFRS,

with reduced value relevance as a consequence.

2.3 Literature Review and Hypotheses Development

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Relevance is one of the fundamental qualitative characteristics of financial reporting

(IASB, 2010). It refers to the usefulness of financial accounting information for decision making

purposes. According to Barth, Weaver and Landsman (2001), relevance and the reliability of

accounting numbers as reflected in equity market values can be investigated through value

relevance tests. Accounting numbers are reflected in equity market values if there is a

relationship between the share price and financial statement information. Francis & Schipper

(1999) and Beisland (2009) suggest that value relevance can be predicted statistically between

financial statement information and share price or returns. Lopes (2002) argues that stock prices

in emerging markets may fail to reflect all information available due to a range of market

imperfections, thus reducing value relevance of accounting information. Potentially, these

institutional differences prevent generalizing the findings from developed markets to East Africa.

We develop four hypotheses to test the relationship between share prices and financial

statements. In the first hypothesis, we compare the relationship between share prices and the

joint earnings and equity book values. Collins et al. (1997) find that the joint value relevance of

earnings and book values has not decreased over time, a finding confirmed by Keener (2011)

who suggest it might actually have increased slightly. Both studies are speculative whether the

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 documented changes in value relevance over time are due to policy changes made by standard-

setters or whether these changes are caused by changes in the economy as a whole. Bova and

Pereira (2012) in an exploratory study of IFRS compliance in Kenya, provide evidence on both

the importance of economic incentives in shaping IFRS compliance and the capital market

benefits to being compliant with IFRS in a low enforcement country. Outa (2011) find mixed

results for the value relevance test and establish there is inadequate research attributed partly to

the growing concerns among researchers that endogeneity can lead to confounding results
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(Antonakis, Bendahan, Jacquart, & Rafael, 2010; Brown, Beeves and Verhoeven 2011). Existing

studies in East Africa have not explicitly addressed this matter which is believed to arise from

the endogenous relationship between independent and dependent variables. In summary we

expect that listed firms having complied with the existing regulations and the converged\revised

IFRS are likely to provide improved accounting information. Consequently, we predict the

following testable hypothesis:

H1: There is a positive relation between share prices and combined earnings and equity

book values in the post IAS\IFRS convergence \revised period.

In our second hypothesis, we examine the relation between share prices and equity book

values. Ohlson (1995) indicates that special items may cause less weight to be placed on earnings

as compared to book values since special items impact earnings persistence. Specials items have

noticeably increased with the revised and converged IFRS presumably to increase the quality of

information. High quality accounting information is perceived to help investors to overcome

information asymmetry between them and the company’s management. Barth, Landsman &

Lang (2008) claim that higher quality accounting information results in more value relevant

earnings and equity book values. Gjerde, Knivsfla & Sattein (2008) argue that the value

Page 9 of 27
 relevance of financial statements improves if investor needs are addressed through accounting

information, as equity market values are established by the same investors. Muharani & Sinegar

(2014) investigate the impact of IAS/IFRS on the value relevance of accounting information for

listed companies at the stock exchanges in Indonesia, Malaysia and Singapore between 2007 and

2011.They find evidence of value relevance of accounting information during the period towards

full IAS/IFRS convergence. Other studies (Alfaraih, 2009; Oyerinde, 2009; Perera &

Thrikawala, 2010; Musthafa & Jahfer, 2013; Nyabundi, 2013; Shehzad & Ismail, 2014) find a
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positive and significant relationship between stock prices on the one hand and earnings and

equity book values on the other hand. In light of these arguments and evidence, we evaluate the

relationship between share prices and equity book values by testing the following hypothesis:

H2: There is a positive relation between share prices and equity book values in the post-

IAS\IFRS convergence\revision period.

In our third hypothesis, we examine the relation between share prices and earnings. IFRS

require the immediate expense of accounting intangibles in many cases especially in service and

technological firms (see Lev and Zarowin (1999) and this reduces both earnings and assets. Also

Hayn (1995) indicate that the increased number of firm losses over time could cause the decline

in the value relevance of earnings over time. Barth, Beaver, and Landsman (2001) find book

values are more value relevant than earnings when losses are present or when earnings include

special items. In a study from China, Lee et al. (2013) find that the value relevance of earnings

per share improved after IFRS convergence with China Accounting Standards. Collins et al.

(1997) suggest that “much of the shift in value-relevance from earnings to book values can be

explained by the increasing significance of one-time items, the increased frequency of negative

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 earnings, and changes in average firm size and intangible intensity across time”. These combined

points lead to our 3rd hypothesis:

H3 : There is a positive relation between share prices and earnings reported in the post

IAS\IFRS convergence \revised period.

Some studies have shown that earnings exhibit high value relevance than equity book

values with conflicting explanations and motivations. Ngole (2012) found IFRS increases the

valuation role of book value of equity and overall value relevance but not earnings. This is
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theorized to happen because of the noise in earnings arising from volatility associated with

disclosures of revaluations and other comprehensive income items. Perhaps this is the reason

why the IASB (2010) conceptual framework focuses on statement of financial position rather

than statement of financial performance. Furthermore, Graham, Harvey & Rajgopal (2005) point

out that Chief Financial Officers regard it as the most important financial metric to external

shareholders. Press releases of results and analysts forecast earnings, apply earnings multiples in

their financial statement analysis. Nyabundi (2013), Gjerde et al. (2008) and Shehzad (2014)

show that earnings are more value-relevant and increase the valuation role as compared to equity

book values. These findings lead to the hypothesis that:

H4: Earnings reported from converged\revised IAS/IFRS are more value relevant than

equity book values.

3. Research Method

3.1 Population and Sampling

The population consists of all companies listed at the NSE between 2005 and 2014.

These companies comply with IAS/IFRS as required by CMA and as stated in the audit opinion

paragraph of their annual report. Four of the companies are cross-listed in Uganda, Tanzania and

Rwanda. NSE is chosen as the primary security exchange consistent with Paananen & Lin (2009)

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 where the stock market with the highest price valuation is selected when there is multiple cross

listing. NSE has 60 companies as at December 2014, six could not be included because they did

not have data in either the pre or post IAS/IFRS revision period. Further, two companies are in

the alternative segment. In total there are 52 companies included with 520 firm year observation

representing 87 % of the stock market.

The data was partitioned into two periods between 2005 and 2009 (5 years), (260 firm
year observations) with an equal matching in 2010-2014 (260 firm year observations) to mitigate
any effect of different firms in the regression equations. By using the same companies in the pre
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and post revision period, each company acts as its own control (see Hung & Subramanyan, 2007)
for cross sectional and time series differences in the sample firms. This approach of “same firm
year” addresses the identification problem typical of single country studies.

3.2 Research Design

In this study, the price model (stock price regressed on earnings per share) is applied as

opposed to the return model (returns regressed on scaled earnings variables). Kothari &

Zimmerman (1995) suggest a framework for choosing between price and return models. Their

results show that price model’s earnings response coefficients are less biased while return

models have less econometric problems. Furthermore, Barth et al. (2001) indicate that price

studies are interested in determining what is reflected in firm value while return studies (price

changes) are interested in determining what is reflected in change in value over a specific period

of time. The current study is interested in firm value which has less limitation on the set of value

relevant questions that can be addressed. In a more recent study, Dontoh, Radhakrishnan &

Ronen (2007) seems to suggest that price should not be applied in Ohlson’s regressions because

of the increased noise in stock prices over time resulting from increases in trading volume driven

by non-information based trades. The current study has continued with price regressions as the

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 circumstances of Dontoh et al. (2007) studies are based on a shift from the traditional capital

intensive economy into high technology service oriented economy.

We apply the Ohlson model (1995) which is one of the best known of the models of

value relevance. It constitutes a solid theoretical framework for market evaluation based on

fundamental accounting variables, as well as on other kinds of information which may be

relevant in predicting firm value (Silvestri & Veltri (2012). Giner & Iniguez (2006) shows that

models based on the original version are able to explain share prices with greater accuracy and
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fewer distortions of the real data than more complex models. Moreover, the Ohlson model is

applied in capital market studies where IFRS is involved because the other ways of

operationalizing relevance and reliability such as earnings management, or timely loss

recognition do not embrace the notion of market efficiency since standards main concern is

capital markets.

In order to use the Ohlson model (1995), researchers modified it as follows:

MVit = β0 +β1Bit +β2Xit +β3Vit +εit Equation 1

The variables are explained in table 1.

In the current study, the model is further modified to accommodate data in the pre and

post convergence period and also to take additional controls for factors that may affect the share

price.

Relative Value Relevance

Relative comparisons are conducted to choose the measure with the greatest information

content (Biddle, Seow & Siegel, 1995). This is suitable in case of mutually exclusive choices or

in case of a ranking among alternatives. The following equations are applied for relative

comparison:

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 Pit= β0 +β1BVEPSit + β2Convergenceit + β3Controlsit + εit Equation 2

Pit= β0 + β1NIPSit + β2Convergence+ β3Controls + εit Equation 3

Pit= β0 +β1BVEPSit + β2NIPSit + β3Vit +β4Convergenceit + β5Controls it + εit Equation 4

The variables are explained in table 1.

Vit is contained in the original model but is ignored by many researchers which reduces the

experimental content. We estimate current year Vit as the next year’s NIPS from the financial

statements of the subsequent year. The variable is also justified on the grounds that investors also
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look at the firm’s future profitability when evaluating firms for investment decisions.

Finally, we consider a non-linear model by incorporating a cross product of book values

and earnings:

Pit= β 0 +β1BVEPSit + β2NIPSit + β3(BVEPS x NIPS) Equation 5

The variables are explained in table 1.

The purpose of the cross product is to explicitly capture the presence of measurement

errors in the accounting variables (Clarkson et al., 2011). These errors would arise from the

introduction of IAS/IFRS. The cross product means that if accounting numbers are subject to

measurement error that grows with firm value, then the resulting product term will have a

significant negative coefficient. The use of cross product can also lead to incremental association

tests where an accounting number is deemed value relevant if its estimated regression coefficient

is significantly different from zero (Palea, 2013).

We apply three controls: Beta, S (Firm Size) and DE (Debt to Equity) (see for example

Sylvestri & Vestry, 2012; Byard & Cebenoyan, 2007). The Beta values are obtained from open

access analytics of Financial Times (FT, 2016) and Thomson Reuters (2016) for the NSE firms.

The beta values are justified on the grounds that beta as a risk proxy is determined to play a key

role in multidimensional models of risk assessment.

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 Size is regarded as a risk factor (Banz, 1981) following observations that stocks of small

firms generate higher returns compared to big firms. This is explained by the assumption that

small firms provide less consistent and accurate information, hence are more risky, which makes

investors ask for higher returns (Cavaliere & Costa, 1999). With regard to Debt to Equity,

empirical evidence provided by Bhandari (1998) shows a relationship between debt and firm

revenue. All variables are deflated by the number of shares in circulation (Ohlson, 1995) to

prevent misleading results of coefficient calculation.

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Regression models are estimated through panel data analysis, because there is joint

heterogeneity among the test variables. The explanatory variables are determined by the

dependent variables; otherwise, there may be a two-way causality. We recognize that firm

related effects may occur that may result in non-consistent estimates if ignored. Previous studies

show that OLS is not consistent because the explanatory variables are not strictly exogenous.

Panel data analysis is applied because it is able to deal with heteroscedasticity and

autocorrelation commonly associated with time series analysis. Panel data analysis can be further

applied if there are only few data points for the regression as it preserves heterogeneity among

the variables (Baltagi, 2005). The current data for all cross sections in the same period are

balanced by including all the variables.

To control for endogeneity, the error term is extracted and correlated with all the

independent variables after completing the panel data regression. The results provide for the

highest correlation of 0.7, indicating that our analysis is not distorted by endogeneity.

Random-effects GLS regressions and additional tests were run. Both tests were run with

all the data and without financial firm’s data for robustness. Because of the panel data used in

the study, Hausman test was applied to decide between random-effects GLS and fixed effects

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 model. The test failed to reject the null hypothesis that the unobserved heterogeneity is

uncorrelated with the regressors. This finding meant that the random and the fixed effects were

not significantly different, and for brevity random-effects GLS results are presented.

4 Results

4.1 Descriptive Statistics

Table II shows the descriptive statistics of the variables applied in the study. The statistics

reported are the means, SD (standard deviations) and change of mean in percentage terms from
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pre to post convergence and revision period. The dependent variable P increases in the post

convergence period. Independent variables also increase suggesting that most of the listed firms

experienced growth over the study period.

(INSERT TABLE II)

4.2 Correlation

Table III shows the Pearson correlation matrix for the sample n=520. The highest

correlations are between BVEPS and NIPS and this is expected since both are derived from firm

performance. This also explains why multicollinearity tests between these variables are

insignificant. The correlation between NIPS and price is medium and positive while BVEPS and

P is low and positive suggesting that NIPS has a higher correlation with P and thus is more value

relevant than BVEPS. The correlation between Vit and NIPS is also strong because both are

based on earnings.

(INSERT TABLE III)

4.2 Random-effects GLS regression results

The data was analyzed using STATA 12 among many choices of statistical packages due

to its ease and wide use in statistical analysis. The results of the random effects regression model

of the deflated price on deflated book values, earnings, forecast earnings and controls are shown

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 in table IV and V. The results presented include slope coefficients, p-values, R2, and Chi2. In

table IV, equation 1, the coefficients are positive and significant with R2 of 47.9% and Chi2 of

0.000 implying that the independent variables contribute to the regression and that the Ohlson

model (1995) can be applied in East Africa. BVEPS, NIPS and combined BVEPS and NIPS

coefficients are positive and significant with improvements in the post convergence as shown by

R2 leading to the acceptance of H1, H2 and H3 . The pre revision\convergence R2 of 14.3% (table

IV column 5) is lower than the post revision and convergence value of 41.1% (table IV column
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4) thus confirming hypothesis H1. These findings suggest that, all other things being equal,

earnings and book values prepared with converged/revised IAS/IFRS are positive and

significant, i.e. value relevant. The findings also show that NIPS with a value of 46.2% (table IV

column 6) is higher than BVEPS with a value of 31.5% suggesting that NIPS is more value

relevant leading to acceptance of H4. These findings suggest that accounting information

prepared with converged/revised IAS/IFRS is value relevant hence investment in standards

revisions is justified.

In applying the product model (Table V), we find no evidence for reduction in relative

value relevance suggesting that the increases in the linear model’s explanatory power is caused

by an increase of the non-linear association between share prices and accounting information.

Therefore, the product is more significant in the post revision/convergence period.

(INSERT TABLE IV AND V)

4.3 Discussions of the results

Overall, the models are statistically significant as the Chi2 values are below 0.05 so they

are a good fit for estimating the coefficients. In table IV equation 4, the coefficients of earnings

and equity book values are positive and significant and increased in the post revision period. In

Page 17 of 27
 applying the Ohlson model, we find an overall R2 of 41.1% which compares to Nyabundi (2013)

of 32.9% for Kenya, Adetunji (2014) 45% for Nigeria and Ames (2013) 31.5 % for South Africa.

Musthafa & Jahfer, (2013) obtained 57.7% for Sri Lanka while Kargin (2013) 47.7% for Turkey,

and Khanagha (2011), 47-58% for UAE. On the other hand, Sylvestri & Veltri (2012), Escare, &

Sefsaf, (2012) Clarkson et al. (2011) and Okafor et al. (2016) report 58-95% values for

developed markets with more increases in code law countries than common law countries.

These findings seem to support existing literature that value relevance might be lower in
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developing countries (for example Hellstrom, 2006) as compared to developed countries. We

concur with Lopes (2002) that stock prices may fail to reflect completely all available company

information due to a range of market imperfections and fewer sources of information. Graham,

King & Bailes (2000) also argue that different economic, social and cultural, characteristics

partly explains why our results are different from developed markets.

These findings contradict Prather et al. (2008) and Daske, Hall, Leuz & Verdi. (2007)

arguments on common law countries that adoption of IFRS may not results in much relevance

since their systems are already investor-oriented and quality information already exist. The

findings also contradict Dung, (2010) and Guthrie (2007) who argued that financial statement

was considered as the least effective means of communicating information since our findings

show that accounting information is value relevant.

A range of possible explanations exist to explain why converged and revised IFRS give

rise to value relevant accounting information in the post convergence period. One possibility is

that convergence and revisions together with interactions of market forces, laws, regulations

standards and enforcement and other institutional activities gave rise to quality standards which

improve accounting information. It is also possible that issues raised in prior years by Outa

Page 18 of 27
 (2011), and ROSC (2010) may have been addressed including improved compliance and

enforcement. These findings confirm studies that IFRS prepared financial statements are value

relevant including studies by Kargin (2013), Musthafa & Jaher (2013), Nyabundi (2013), and

Perera (2010). The arguments for weak regulation and enforcement appear to be defied in East

Africa consistent with Ball (2006) and Leuz & Wysocki (2008).

Even of great interest is the finding in Kenya, Italy and Sri Lankan study that earnings are

more value relevant than book values, which is the reverse finding of Lopes (2002) in Brazil,
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Mustapha & Jahfer (2013) and Graham et al. (2005). This could be explained by the fact that

investors in East Africa are possibly obsessed with profits that’s why they care less about the

equity values. It is no wonder analysts and CFOs focus on EPS in contradiction to IASB (2010)

conceptual framework' who seem to prefer equity book values (Ngole, 2012). Beisland (2009)

argue that equity book values are more value-relevant as earnings tend to have noise arising from

IFRS choices associated.

Although our empirical evidence offers support for the causal relation between share

price and the reported accounting indicators, Ball & Brown (2014) reported that up to 90 % of

the price changes occur before the announcements of financial statements suggesting that there

are many other factors that influence price.

4.4 Robustness
We run regressions excluding the financial firms which are subject to stronger

enforcement and regulatory disclosure over and above that of the other listed companies. The

results are shown in table VI. Though slightly different in values, they show an increase in the

association between share prices, earnings and equity book values in the post revision period

with NIPS being more value relevant than BVEPS, thus confirming the initial results.

(INSERT TABLE VI)

Page 19 of 27
 Similarly, our results excluding loss making firms ( not tabulated ) remain the same while

results from loss making firms shows the model does not work partly because of sample size

and multicollinearity.

The correlation results (Table III) show that there is no high correlation between

independent variables. However, the correlation between BVEP and NIPS (r=0.775) is high

when compared to that of the other variables. We include these two variables in separate

regression models. The results can be obtained from Table IV (column 6) and remain robust.
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We also run biannual trends to see changes in R2 over time (results available on request).

Existing literature (for example Hellstrom 2006, Okafor et al., 2016) show mixed evidence

against the general view that value relevance should decline over time as changes such as

technology take effect in different economies. Our results show steady rise as revisions and

convergence efforts set in but later on decline consistent with Hellstrom (2006). The decline is

possibly due to many factors including firms shifting to technology and inclusion of intangible

asset bases.

5. Conclusion and Implications

This study examines how converged/revised IAS/IFRS impact the ability of reported

equity book values and earnings to explain share prices. East Africa has had a few studies and

longer history of IFRS implementation thus providing an opportunity to compare the explanatory

power of pre and post revision\convergence of earnings numbers under two different time

periods. We introduce a cross product term to capture the presence of measurement errors in the

accounting variables.

The results using random effects GLS suggest that there is an increase in value relevance

following adoption of revised and converged IAS\IFRS. We also show that NIPS is more value

Page 20 of 27
 relevant than BVEP. These happen in spite of the region being regarded as a low IFRS

enforcement, we therefore provide evidence of IFRS benefits consistent with the belief that

benefits can arise where there are incentives to achieve higher levels of compliance. Our cross

product results are similar but the explanatory powers are higher mainly because the non-linear

effects are controlled for. We conclude that revisions and convergence of IFRS results in higher

price value relevance in East Africa. We argue that the benefit of revised\converged IFRS is

captured by an increase in the association between share price, book value and earnings. We also
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find that value relevance in East Africa is lower than that in developed countries as indicated in

existing studies.

These findings have implications to companies and the East African capital markets

because increases in value relevance and reliance on accounting information promotes investors’

interest in the region, improves the region’s credibility and can also lower the cost of capital.

Thus investors are able to make informed decisions. The low value relevance rates compared to

developed markets also imply there is still room for capital market regulators to enhance market

efficiencies in East Africa. We also extend the debate on whether value relevance is relevant in

emerging markets given its imperfect market, weak regulation and enforcement and fewer

sources of information and provide evidence that IFRS can provide benefits even in low

enforcement countries. The results may also be useful to IASB, professional accounting bodies,

regulators (address incentives) and countries (motivated by positive results) seeking to adopt

IAS/IFRS as quality financial reporting standards. The key point to IASB is that the earnings

matter as much as equity book values so the conceptual framework should focus on both as it

appears the current conceptual framework lean towards the equity book values.

Page 21 of 27
 Despite these interesting results and implications, the study is not without limitations.

Accounting data manually collected from the public domain is based on the accuracy of

management and auditors. Any managerial or auditor misrepresentations could impact our

findings. One limitation of the Ohlson model is that the dynamics considered are not the only

possible ones that could evolve over time. We also believe that simple comparisons based on R2

may not provide all the evidence for value relevance. Therefore, future research may consider

incorporating other methods.

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Page 27 of 27
 Table I: Description of Variables

Variable Description Measurement Source

P Price Price 3 months after year-end computed as current Ohlson (1995)
market capitalization scaled by outstanding ordinary Ohlson (2001)
share capital.
β0 Intercept Share price variation, not explained by the variables
on the right hand side of equation.
MVit Market Value Value of a firm i at time t, substituted by Price. Ohlson (1995)

NIPS Net Income Per Computed before and deflated with the shares. Ohlson (1995)
Share
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BVEP Book value of equity per share. Ohlson (1995)

BVEPx Cross Product Book Value of equity x Net income Per Share Clarkson et al.
NIPS Term (2011)
Vit Extra Vit depends on the information available through extra- Ohlson (2001)
Information accounting sources known to the market but not yet Byard and
incorporated in the accounting system. Estimated as Cebenoyan (2007)
predictions of future earnings by financial analysts.
C Convergence a dummy variable which equals 1 for years after
convergence projects and 0 otherwise.
εit Error term Part of the price which is not interpreted by the
model.
Controls
B Beta Beta is the systematic market risk index which is the Byard and
risk of performance of a share. Cebenoyan (2007)
Sylvestri and
Vestry (2012)
S Size Size is a specific firm risk indicator measured as the Banz (1981)
natural logarithm of assets at year-end.
DE Debt to Equity Debt to Equity is a specific risk firm indicator derived Bhandari (1998)
from year-end total liabilities divided by year end book
value of equity.

Table I is the description of variables applied in the study

 Table II: Descriptive Statistics

Pre-Revision and Post-Revision and % mean

Variables N Convergence Convergence change
Mean SD Mean SD
NIPS 520 7.050 10.310 13.950 24.730 0.980
BVEPS 520 35.400 52.870 56.060 90.170 0.580
Price 520 75.520 77.620 83.350 117.200 0.100
Convergence 520 0.210 0.410 0.990 0.060 3.710
Vit 520 8.632 15.224 12.920 23.991 0.500
BVEP x
520 609.560 2,084.330 2,547.880 10,033.300
NIPS 3.180
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Beta 520 0.120 0.445 0.810 0.445 5.750

SIZE 520 15.720 1.760 16.600 2.150 0.060
DE 520 2.190 2.760 2.320 2.580 0.060

Table II represents the tabulated statistics of the variables applied in the study with the variables
explained in Table I.

Table III: Pearson Correlation Coefficient for Aggregate Sample

Variable Direction Price BVEP NIPS Vit Beta DE Size Converg.

Price 1
BVEP Coeff 0.423 1
p-value 0.000
NIPS Coeff 0.524 0.775 1
p-value 0.000 0.000
Vit Coeff 0.480 0.625 0.789 1
p-value 0.000 0.000 0.000
Beta Coeff -0.207 -0.278 -0.213 -0.228 1
p-value 0.000 0.000 0.000 0.000
DE Coeff -0.026 -0.049 0.007 -0.007 0.444 1
p-value 0.554 0.260 0.872 0.866 0.000
Size Coeff -0.019 0.042 0.075 0.046 0.477 0.504 1
p-value 0.662 0.335 0.086 0.294 0.000 0.000
Converg Coeff 0.009 0.120 0.162 0.144 0.002 -0.000 0.209 1
p-value 0.824 0.006 0.000 0.001 0.961 0.987 0.000

Table III represents pairwise Pearson correlation with coefficient the variables explained in Table I
 Table IV: Random-effects GLS Regression Results Including Finance Firms

Variable Prediction Ohlson Relative (Post vs. Pre) % BVEPS vs. NIPS
Equation 1 Equation 4 change Equation 2 and 3
N=520 Post(N= 260) Pre(N= 260) Pre vs. Aggregate (N= 520)
Post
BVEPS Post>Pre 0.158 0.308 0.037 0.314
(p>z) 0.012 0.000 0.757 0.000
R2 31.450
Prob > chi2 0.000
NIPS Post>Pre 1.086 1.272 1.312 1.521
p>z 0.000 0.000 0.006 0.000
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R2 46.210
Prob > chi2 0.000
% Change 46.900 %
Vti 0.209 0.747 -0.245
p>z 0.323 0.017 0.285
R2
Prob > chi2
Beta -17.603 -17.401
p>z 0.534 0.404
Size 6.976 -5.134
(p>z) 0.252 0.259
DE 0.052 0.561
(p>z) 0.983 0.782
Convergence -5.319 -18.724
p>z 0.922 0.009
R2 47.950 41.110 14.250 188
Prob > chi2 0.000 0.000 0.001

*All tests carried out at .05 levels

Table IV sets out the coefficients from GLS regressions for the sample period. The variables are
defined in Table I above.
 Table V: Random-Effects GLS Regression Results Including Finance Firms with Cross Product

Variable Prediction Ohlson Relative (Post vs. Pre) % BVEPS vs. NIPS
Equation Equation 5 Change Equation 5
1 Pre vs.
post
N=520 Post(N= Pre(N= Aggregate(N=
260) 260) 520)
BVEPS Post>Pre 0.487 1.098 0.249 0.589
(p>z) 0.000 0.000 0.058 0.000
Interaction -0.002
(p>z) 0.020
R2 23.450
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Prob > chi2 0.000

NIPS Post>Pre 1.815 2.181 2.374 2.114
p>z 0.000 0.000 0.000 0.000
Interaction -0.000
(p>z) 0.211
R2 61.31
Prob > chi2 0.000
% Change 160.600
BVEPS vs NIPS
BVEPS X NIPS - -0.004 -0.008 -0.011
0.000 0.000 0.001
R2 53.020 49.990 41.370 20.800
2
Prob > chi 0.000 0.000 0.000

Table V sets out the coefficients from GLS regressions for the sample period with cross product
including financial firms.
 Table VI : Random-Effects GLS Regression Results Excluding Finance Firms

Variable Prediction Finance Excluding Finance Firms

Firms Only
Equation 4 Relative (Post vs. Pre) % BVEPS vs. NIPS
Equation 4 Change Equation 2 and 3
Pre vs.
post
Aggregate Post(N= Pre(N= Aggregate (N=
260) 260) 520)
BVEPS Post>Pre 0.691 0.257 0.125 0.281
(p>z) 0.000 0.000 0.295 0.000
R2
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25.760
Prob > chi2 0.000
NIPS Post>Pre 1.944 1.150 1.570 1.425
p>z 0.001 0.000 0.003 0.000
R2 40.270
Prob > chi2 0.000
% Change 14.510
BVEPS vs
NIPS
Vt 0.169 0.596 -0.306
p>z 0.788 0.096 0.194
R2
Prob > chi2
Beta -59.32 -4.884 -32.561
Prob > chi2 0.224 0.894 0.188
Size 2.365 -5.229
(p>z) 0.757 0.318
DE 0.787 -2.044
(p>z) 0.148 0.511
Convergence 10.038 -18.096
p>z 0.862 0.019
R2 50.870 39.000 28.750 35.700
2
Prob > chi 0.000 0.000 0.001

Table VI sets out the coefficients from GLS regressions for the sample period excluding
financial institutions.