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JAEE
7,3 IFRS convergence and revisions:
value relevance of accounting
information from East Africa
352 Erick Rading Outa
Strathmore Business School, Nairobi, Kenya
Peterson Ozili
University of Essex, Colchester, UK, and
Paul Eisenberg
University of Portsmouth, Portsmouth, UK

Abstract
Purpose – The purpose of this paper is to examine the relative value relevance of accounting information
arising from the adoption of converged and revised International Accounting Standards (IAS)/International
Financial Reporting Standards (IFRS) in East Africa.
Design/methodology/approach – 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.
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.
The 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. The 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. The authors 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. The results
may be useful to accounting preparers, regulators, investors, standard setters and countries seeking to adopt
IAS/IFRS in developing countries.
Keywords East Africa, Accounting information, Value relevance, Converged/Revised IFRS, IFRS/IAS,
Ohlson model
Paper type Research paper

1. Introduction
This paper examines the value relevance of accounting information arising from converged/
revised International Accounting Standards (IAS)/International Financial Reporting
Standards (IFRS) for a sample of companies listed in East Africa for the period
2005-2014. 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.

JEL Classification — G14, G15, G30, M41, M42

Journal of Accounting in Emerging
Economies
Vol. 7 No. 3, 2017
pp. 352-368
© Emerald Publishing Limited
2042-1168
DOI 10.1108/JAEE-11-2014-0062
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. The authors also thank Professor Elmar Venter of the University of Pretoria for the special
attention he gave the paper. The authors appreciate insightful comments and suggestions from two
anonymous reviewers.
 Value relevance has been studied in many perspectives. The existing literature does not IFRS
present an unequivocal view as to whether the value relevance of accounting information convergence
increases or deteriorates due to the usage of IAS/IFRS, which are perceived to be of high and revisions
quality by standard setters. Barth et al. (2008) find in a cross-country study for the period
1990-2004 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 et al. (2011) show “no change” in value 353
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
improving quality of financial reporting has not been completely addressed with specific
references to their mandatory adoption in Europe. Okafor et al. (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 and 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 USA.
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 and 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 et al. (2012) and Lee et al. (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 et al., 2002). Also, IAS/IFRS enforcement mechanisms are considered to be
inadequate (Anandarajan and Hasan, 2010; Report on the Observance of Standards and
Codes (ROSC), 2010; Daske et al., 2013). These attributes in East Africa severely
affect informational efficiency (efficient market assumes that pricing reflects
available information) and constrains the effectiveness of IFRS given that IFRS is fair
value based and works 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 example, Anandarajan and 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 show 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.
JAEE The research objective is to examine the value relevance of accounting information
7,3 based on converged/revised IAS/IFRS. The current study seeks to answer the following
research questions:
RQ1. Are equity book values and earnings based on converged/revised IAS/IFRS related
to the share prices?
RQ2. Does the explanatory power of the earnings and equity book values increase in the
354 post-convergence period?
RQ3. Which of these two indicators is more value relevant – equity book values or
earnings?
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 vs 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 and other stakeholders. 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 behavior 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 and 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.
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

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 IFRS
The first East African Community was founded in 1967 by Kenya, Uganda and Tanzania and convergence
was one of the oldest and most prosperous Regional Economic Communities in the world prior and revisions
to its collapse in 1977. The Treaty for Establishment of the East African Community was
signed in 1999 and entered into force in 2000 (East Africa Community, 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. 355
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.
The Council of the Institute of Certified Public Accountants of Kenya 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 as the national standard. Report on the Observance of Standards
and Codes (2014) on Uganda identifies some improvements in compliance but also
highlights some challenges. The National Board of Accountants and Auditors of Tanzania
issued a technical pronouncement which made IAS/IFRS mandatory with effect from July 1,
2004. In Rwanda, the Institute of Certified Public Accountants of Rwanda was established
under the Companies Act 2009 and requires 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 et al.
(2008) argue that under codel law, creation of shareholder value is subordinated to the needs
of other stakeholders, mainly insiders, who can utilize tax 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

Relevance is one of the fundamental qualitative characteristics of financial reporting
(International Accounting Standards Board (IASB), 2010). It refers to the usefulness of
financial accounting information for decision-making purposes. According to Barth et al.
(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 and 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.
JAEE We develop four hypotheses to test the relationship between share prices and financial
7,3 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 documented changes in value relevance over time are due to policy
356 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 (Antonakis et al., 2010; Brown
et al., 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 et al. (2008) claim that higher quality accounting information results in
more value relevant earnings and equity book values. Gjerde et al. (2008) argue that the
value relevance of financial statements improves if investor needs are addressed through
accounting information, as equity market values are established by the same investors.
Muharani and 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 toward full IAS/IFRS convergence. Other studies (Alfaraih,
2009; Oyerinde, 2009; Perera and Thrikawala, 2010; Musthafa and Jahfer, 2013; Nyabundi,
2013; Shehzad and Ismail, 2014) find a 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
requires 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) indicates that the increased number of firm losses over time could
cause the decline in the value relevance of earnings over time. Barth et al. (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 CAS. Collins et al. (1997)
suggest that “much of the shift in value-relevance from earnings to book values can be IFRS
explained by the increasing significance of one-time items, the increased frequency of negative convergence
earnings, and changes in average firm size and intangible intensity across time.” and revisions
These combined points lead to our third 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
357
values with conflicting explanations and motivations. Ngole (2012) found that IFRS
increases the valuation role of book value of equity and overall value relevance but not
earnings. This is 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 et al. (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 and Ismail (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 and Lin (2009) 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 percent of
the stock market.
The data were partitioned into two periods between 2005 and 2009 ( five 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- and post-revision period, each company acts as its own control
(see Hung and Subramanyam, 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 and
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
JAEE studies (price changes) are interested in determining what is reflected in change in value
7,3 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 et al. (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
358 continued with price regressions as the 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 (1995) model 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 and Veltri, 2012). Giner and Iniguez (2006) show
that models based on the original version are able to explain share prices with greater
accuracy and 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 (1995) model, researchers modified it as follows:
MVit ¼ b0 þb1 Bit þb2 X it þb3 V it þeit (1)
The variables are explained in Table I.
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.

3.3 Relative value relevance

Relative comparisons are conducted to choose the measure with the greatest information
content (Biddle et al., 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:
P it ¼ b0 þb1 BVEPSit þb2 convergenceit þb3 controlsit þeit (2)

P it ¼ b0 þ b1 NIPSit þb2 convergence þb3 controlsþeit (3)

P it ¼ b0 þb1 BVEPSit þb2 NIPSit þb3 V it þb4 convergenceit þ b5 controlsit þeit (4)
The variables are explained in Table I.
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 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:
P it ¼ b0 þb1 BVEPSit þb2 NIPSit þb3 ðBVEPS  NIPSÞ (5)
The variables are explained in Table I.
Variable Description Measurement Source
IFRS
convergence
P Price Price 3 months after year-end computed as Ohlson (1995) and Ohlson (2001) and revisions
current market capitalization scaled by
outstanding ordinary share capital
β0 Intercept Share price variation, not explained by the
variables on the right hand side of equation
MVit Market Value of a firm i at time t, substituted by Ohlson (1995) 359
value price
NIPS Net income Computed before and deflated with the Ohlson (1995)
per share shares
BVEP Book value of equity per share Ohlson (1995)
BVEP × NIPS Cross- Book value of equity × net income per share Clarkson et al. (2011)
product
term
Vit Extra Vit depends on the information available Ohlson (2001) and
information through extra-accounting sources known to Byard and Cebenoyan (2007)
the market but not yet incorporated in the
accounting system. Estimated as 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 β β is the systematic market risk index which Byard and Cebenoyan (2007)
is the risk of performance of a share and Silvestri and Veltri (2012)
S Size Size is a specific firm risk indicator measured Banz (1981)
as the natural logarithm of assets at year-end
DE Debt to Debt to equity is a specific risk firm indicator Bhandari (1988)
equity derived from year-end total liabilities divided Table I.
by year-end book value of equity Description
Note: This table is the description of variables applied in the study of variables

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 0 (Palea, 2013).
We apply three controls: β, S ( firm size) and DE (debt to equity) (see e.g. Silvestri and
Veltri, 2012; Byard and Cebenoyan, 2007). The β values are obtained from analysts namely
Financial Times and Thomson Reuters for the NSE firms. The β values are justified on the
grounds that β as a risk proxy is determined to play a key role in multidimensional models
of risk assessment.
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 and Costa, 1999). With regard to
debt to equity, empirical evidence provided by Bhandari (1988) 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.
JAEE Regression models are estimated through panel data analysis, because there is joint
7,3 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
360 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 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, standard deviations and change of mean in percentage terms from
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.

4.2 Correlation
Table III shows the Pearson correlation matrix for the sample n ¼ 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.

Pre-revision and convergence Post-revision and convergence

Variables n Mean SD Mean SD % mean change

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 × NIPS 520 609.560 2,084.330 2,547.880 10,033.300 3.180
β 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. Note: This table represents the tabulated statistics of the variables applied in the study with the variables
Descriptive statistics explained in Table I
Variable Direction Price BVEP NIPS Vit β DE Size Converg.
IFRS
convergence
Price 1 and revisions
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 1 361
p-value 0.000 0.000 0.000
β 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 Table III.
Converg. Coeff. 0.009 0.120 0.162 0.144 0.002 −0.000 0.209 1 Pearson correlation
p-value 0.824 0.006 0.000 0.001 0.961 0.987 0.000 coefficient for
Note: This table represents pairwise Pearson correlation with coefficient the variables explained in Table I aggregate sample

4.3 Random-effects GLS regression results

The data were 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 in Tables IV and V. The results presented include slope coefficients, p-values,

Ohlson Relative (post vs pre) BVEPS vs NIPS

Equation (1) Equation (4) % change Equations (2) and (3)
Variable Prediction n ¼ 520 Post (n ¼ 260) Pre (n ¼ 260) pre vs post Aggregate (n ¼ 520)

BVEPS Post Wpre 0.158 0.308 0.037 0.314

( p Wz) 0.012 0.000 0.757 0.000
2
R 31.450
2
Prob.Wχ 0.000
NIPS Post Wpre 1.086 1.272 1.312 1.521
pW z 0.000 0.000 0.006 0.000
R2 46.210
2
Prob.Wχ 0.000
% change 46.900
Vit 0.209 0.747 −0.245
pW z 0.323 0.017 0.285
2
R
Prob.Wχ2
β −17.603 −17.401
pW z 0.534 0.404
Size 6.976 −5.134
( p Wz) 0.252 0.259
DE 0.052 0.561
( p Wz) 0.983 0.782
Convergence −5.319 −18.724
pW z 0.922 0.009
Table IV.
R2 47.950 41.110 14.250 188 Random-effects
Prob.Wχ2 0.000 0.000 0.001 GLS regression
Notes: This table sets out the coefficients from GLS regressions for the sample period. The variables are results including
defined in Table I. All tests carried out at 0.05 levels finance firms
JAEE Ohlson Relative (post vs pre) BVEPS vs NIPS
7,3 Equation (1) Equation (5) % change Equation (5)
Variable Prediction n ¼ 520 Post (n ¼ 260) Pre (n ¼ 260) pre vs post Aggregate (n ¼ 520)

BVEPS PostW pre 0.487 1.098 0.249 0.589

( p W z) 0.000 0.000 0.058 0.000
Interaction −0.002
362 (p Wz) 0.020
R2 23.450
Prob.Wχ2 0.000
NIPS PostW pre 1.815 2.181 2.374 2.114
p Wz 0.000 0.000 0.000 0.000
Interaction −0.000
(p Wz) 0.211
R2 61.31
Prob.Wχ2 0.000
% change 160.600
BVEPS vs NIPS
BVEPS × NIPS – −0.004 −0.008 −0.011
Table V.
0.000 0.000 0.001
Random-effects GLS
regression results R2 53.020 49.990 41.370 20.800
2
including finance Prob.Wχ 0.000 0.000 0.000
firms with Note: This table sets out the coefficients from GLS regressions for the sample period with cross-product
cross-product including financial firms

R2 and χ2. In Table IV, Equation (1), the coefficients are positive and significant with R2 of
47.9 percent and χ2 of 0.000 implying that the independent variables contribute to the
regression and that the Ohlson (1995) model 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-H3. The pre-revision/
convergence R2 of 14.3 percent (Table IV, column 5) is lower than the post-revision and
convergence value of 41.1 percent (Table IV, column 4) thus confirming 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 percent (Table IV, column 6) is higher than BVEPS with a value of
31.5 percent 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.

4.4 Discussions of the results

Overall, the models are statistically significant as the χ2 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 applying the Ohlson model, we find an overall R2 of 41.1 percent which compares
to Nyabundi (2013) of 32.9 percent for Kenya, Adetunji et al. (2016) of 45 percent for Nigeria
and Ames (2013) of 31.5 percent for South Africa. Musthafa and Jahfer (2013) obtained
57.7 percent for Sri Lanka while Kargin (2013) obtained 47.7 percent for Turkey, and
Khanagha (2011) obtained 47-58 percent for UAE. On the other hand, Silvestri and IFRS
Veltri (2012), Escare and Sefsaf (2012), Clarkson et al. (2011) and Okafor et al. (2016) report convergence
58-95 percent values for developed markets with more increases in code law countries than and revisions
common law countries. These findings seem to support existing literature that value
relevance might be lower in developing countries (e.g. 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 363
fewer sources of information. Graham et al. (2000) also argue that different economic,
social and cultural, characteristics partly explains why our results are different from
developed markets.
These findings contradict Prather-Kinsey et al. (2008) and Daske et al. (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 gives
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 (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 and Jahfer
(2013), Nyabundi (2013) and Perera and Thrikawala (2010). The arguments for weak
regulation and enforcement appear to be defied in East Africa consistent with Ball (2006)
and Leuz and 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, Musthafa and 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 is 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) argues 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 and Brown (2014) reported that up to
90 percent of the price changes occur before the announcements of financial statements
suggesting that there are many other factors that influence price.

4.5 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.
Similarly, our results excluding loss making firms (not tabulated) remain the same while
results from loss making firms show 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 ¼ 0.775) is high
JAEE Excluding finance firms
7,3 Finance
firms only Relative (post vs pre) BVEPS vs NIPS
Equation (4) Equation (4) % change Equations (2) and (3)
Variable Prediction Aggregate Post (n ¼ 260) Pre (n ¼ 260) pre vs post Aggregate (n ¼ 520)

BVEPS PostWpre 0.691 0.257 0.125 0.281

364 ( p W z)
2
0.000 0.000 0.295 0.000
R 25.760
Prob.Wχ2 0.000
NIPS PostWpre 1.944 1.150 1.570 1.425
p Wz 0.001 0.000 0.003 0.000
R2 40.270
Prob.Wχ2 0.000
% change 14.510
BVEPS vs NIPS
Vt 0.169 0.596 −0.306
p Wz 0.788 0.096 0.194
R2
Prob.Wχ2
β −59.32 −4.884 −32.561
Prob.Wχ2 0.224 0.894 0.188
Size 2.365 −5.229
( p W z) 0.757 0.318
DE 0.787 −2.044
(p Wz) 0.148 0.511
Convergence 10.038 −18.096
0.862 0.019
p Wz
Table VI.
Random-effects R2 50.870 39.000 28.750 35.700
GLS regression Prob.Wχ2 0.000 0.000 0.001
results excluding Note: This table sets out the coefficients from GLS regressions for the sample period excluding financial
finance firms institutions

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.
We also run biannual trends to see changes in R2 over time (results available on request).
Existing literature (e.g. 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 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 IFRS
that benefits can arise where there are incentives to achieve higher levels of compliance. convergence
Our cross-product results are similar but the explanatory powers are higher mainly because and revisions
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 find that value relevance in East Africa is lower than that in 365
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 promote
investors’ interest in the region, improve 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 toward the equity book values.
Despite these interesting results and implications, the study is not without limitations.
Accounting data manually collected from the public domain are 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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Corresponding author
Erick Rading Outa can be contacted at: ericouta2002@yahoo.co.uk

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