2. international accounting standards and value relevance of book value and earnings panel study...

8/10/2019 2. International Accounting Standards and Value Relevance of Book value and Earnings Panel study from Pakistan

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International Journal of Contemporary Business Studies

Vol: 2, No: 9.September, 2011 ISSN 2156-7506

Available online at http://www.akpinsight.webs.com

Copyright 2011. Academy of Knowledge Process

International Accounting Standards and

Value Relevance of Book value and

Earnings: Panel study from Pakistan

Muhammad Azeem

BS. (Acc & Fin) Scholar

Department of Commerce

Bahauddin Zakariya University, Multan-Pakistan

Rehana Kouser

(PhD Scholar)

Department of Commerce

Bahauddin Zakariya University, Multan-Pakistan

ABSTRACT

Study targets to check the impacts of International Accounting Standards (IASs)

on the value relevance of accounting information, specifically, Book value

(BVPS) and Earnings (EPS).Value relevance, the ability of accounting

information to explain changes in the share prices (usefulness in stock valuation),is assumed to be affected by change in accounting standards, as evident in

literature. Worldwide increasing importance and adoption of IAS/IFRSs by the

EU and other counties in world, in 2005, caused the re-notification for adoption ofIASs in Pakistan. Impacts of this adoption (mandatory) are observed on fifty two

(52) largest (by market capitalization) non-financial, public limited companies

listed on Karachi Stock Exchange by conducting the regression analysis. Analysisis based on total of eight years financial data (2002-09). Results of statistical

analyses show that adoption of IASs improved the value relevance of book value

and earnings. The financial information provided in annual report is more relevantin making investment decisions after the adoption of IASs in 2005. Countryrelated factors are seemed to be less affective in case of Pakistan and value

relevance is higher than find in research studies, conducted in other parts of the

world with similar context.

Keywords: International Accounting Standards (IASs), Value Relevance, StockValuation, Book Value, Earnings, EU, BVPS, EPS, Market Capitalization

JEL classification codes: G11, G14, G15

INTRODUCTION

Todays investors have to make investment decisions based on opportunities arising worldwide.Integration of capital markets globally made the uniform accounting frameworks need crucial. This is


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difficult and expensive task for an investor to make well-informed investment decisions based ondifferent reporting skeleton. The need of worldwide comparable accounting and reporting standards isgenerated as a result of globalized financial markets (Zarzeski, 1996). On the other hand, it is alsodifficult and expensive for the companies to generate finances from diversified regions by presenting the

financial information in multiple reporting formats due to higher transaction cost. The rapid growth of thefinancial markets has a big concern to the success of multinational businesses. Changing investor

behavior, along with the other factors, participated to the internationalization of economic activities.Uniformity of accounting standards is also critical in the value relevancy area because they are importantdeterminants of financial reporting quality. Proponents of internationalized financial reporting standards

argue that such diversity reduce the quality and the relevance of accounting information as quoted byPurvis et al. (1991), if all firms follow the same paradigm of accounting and reporting standards externalfinancial reports of firms will offer improved uniform disclosures and more useful accounting informationfor decision making to investors.

Research article is divided into six parts. After providing the background in first section Introduction,second part Major Issues in Financial Reporting: Globalization Perspective discusses the purpose of

financial reports, role of accounting standards and affects of globalization on reporting practices. It alsoincludes the emergence and importance of IASs and IFRSs. Value Relevance is explained in the section.

It explains the meanings, and types of methods to gauge value relevance. Intervening factors like MarketEfficiency and accounting quality are also discussed. Third Section is Financial Reporting System ofPakistan. Section four includes the literature reviewed. Fifth section discusses research methods used in

the study. Six and last part contains the Empirical Findings and Conclusion.

MAJOR ISSUES IN FINANCIAL REPORTING: GLOBALIZATION PERSPECTIVE

Financial Reporting is only the process of delivering financial information through the financial reports.These financial reports are called annual reports. Annual reports include the financial statements,

disclosures to the financial statements, accounting framework by use of which accounting statements areprepared, and necessary information related to the shareholders. Reporting may be on quarterly basis,

semi annually or annually. Normally reports are issued annually, however it depends on the rules andlegal bindings for corporate sector of country. It also varies with type of company either public limited, orprivate limited.

Basically financial reporting is important for public limited companies. Public limited companies are

those companies which involve the interest of large public. Public limited companies have a lot of sharesissued purchased by general public. These shares are traded on the floor of stock exchanges in thecountry. Public limited companies (PLCs) have the advantage that they can gather a large pool of funds.

But the problem here faced by the company is to keep the prices of its share high and stable so that it canattract prospective investors. Financial information is issued through the annual reports. Investors then

analyses the information and try to estimate expected share price of the company. Original share price isdetermined by the market forces as per its characteristics. However it is possible to determine share price

using some stock valuation models and statistical technique.

Significance of Accounting StandardsFor each profession, there is always a paradigm. Financial reporting also has its own frameworks. It has

accounting principles, policies and conventions, that are used everywhere and are integral parts ofaccounting and financial reporting. They are famous with the term of accounting standards.

However there is also a space for choices in accounting practices. For guidance on these practices everycountry has its set of accounting rules, these rules are called Generally Accepted Accounting Policies

(GAAP). Other requirements are posed normally by the controlling bodies of accounting, stock exchanges


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and requirements held by companys law. So for quality financial reporting company must abide by theserequirements and follow relevant reporting skeleton. At the end company must take a certificate from thecertified accountant that it has followed all the accounting policies, rules and fulfilled relatedrequirements. This certificate is known as the auditors report. It is considered as the evidence of good

financial reporting.

Globalization and Diverse Financial Reporting PracticesGlobalization is very important factor to affect the financial reporting practices. It is the integration of

world to solve the problem of scare resources. Like many others, firms (PLCs) too have the opportunitynow to get capital from international markets. They can sale their share to international investors for

capital accumulation. No doubt globalization supplies many opportunities to the PLCs but it gives certainchallenges also. The leading advantage of that it provides bigger markets which result bigger profits andultimately leads to greater wealth for further investment, development and reducing poverty in many

countries.

In order to ensure smooth functioning of capital markets, the availability of reliable, clear and comparablefinancial information is essential. After globalization, there is a dire need for comparable standards offinancial reporting which has become dominant due to the development in number, reach and size of

multinational companies, foreign investments, cross-border purchase and sale of securities. But due to thesocial, cultural, legal and economic variances among countries, International accounting standards and

their practices differ extensively. This is the reason the integrity of financial reports becomes doubtfulbecause the same transactions are accounted and recorded differently in different countries and if we wantto avail the opportunities created by globalization, there must be some common or integrated set ofaccounting rules which may be accepted worldwide.

Increasing trend of investing and borrowings in foreign countries and globalization of businesses andservices required the harmonization of accounting standards. Further need can be clarified with following

benefits of harmonization:

Harmonization make certain about high quality of financial information disclosed in financial

statements and trustworthiness of information. It plays a vital role in economic and financial development of country in some cases.

Multinational companies having subsidiaries in different countries can be compared andevaluated in term of their performances.

Meaningful results of performance can be taken for decision making.

Harmonization creates international credibility of corporation. Harmonization of accounting standards is a foundation for analyzing international capital

markets which may, in result, lessen the cost of capital and therefore the performance ofcompany can be improved.

It gives a place where no country can get the advantage or disadvantage of its GAAP.

Emergence and Importance of IAS/IFRSs

After catering the problem of comparability and understandability, results were integrated accounting andfinancial reporting standards. These efforts started with the establishment of IASC (InternationalAccounting Standards Committee) in 1973. The broad objective of the IASC was harmonization of

accounting practices through by the h the formulation of accounting standards and to promote theirworldwide acceptance.

The term IFRS abbreviated for International Financial Reporting Standards is used for the combination ofInternational Accounting Standards and Financial Reporting Standards. These are the integrated set of

accounting standards which are adopted all over the world the world. IFRSs are issued by the IASB.However former IASs were issued by the IASC the previous structure of IASB.


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The new structure of IASC was accepted by its membership and it was declared as an autonomous bodythat has trustees and the board. Board members are appointed by the trustees and exercise oversight andincrease funds needed but the major responsibility of the board is to set the accounting standards. And thisnew structure has started its work from January 1, 2001 which is now known as IASB (International

Accounting Standards Board). IASBs major job is to create harmonization which give lots of benefits tothe investor analysts because it leads towards the similarities and reduce differences in financial

statements and this make its comparability feature possible. In this the one report of multinationalcompanies can be used anywhere and they can save their lot of time and efforts which they have spent formaking different reports for different countries. Role of stock exchanges as the capital markets is also

improved with this harmonization of accounting and reporting standards around the globe. Increasingnumber of firms listed on the local stock exchanges needs investor protection rules and policies.

Another milestone in the integration of capital markets is the establishment of IOSCO (InternationalOrganization of Securities Commissions) in mid-2000. This organization like a local securities exchange

commission regulates the stock exchanges all over the world. It can be regarded an international regulatorof stock exchanges in world as IASB is international body of accounting standards.

Harmonization does not finished in itself but it is way to reach toward certain laudable policy goal. The

main two benefits were may get from harmonization of accounting standards, first is performanceexcellence achieved through low transition cost. The other is well known, discussed, and so much neededdue to globalization of firms, that is comparability factor for investors, they will be in case to compare the

results if they are shareholder of multinational company or associated with parent company which havesubsidiary in other country. It will reduce the transaction cost, as some Canadian companies prepare newfinancial statements in accordance to U.S GAAP also because they have subsidiaries there also, so for

government, stock markets and standard setting bodies investors and all stakeholders will get relief inharmonization of accounting standards around the world.

Value Relevance of Accounting InformationValue relevance is the ability of financial information to predict share prices. While using thefundamental analysis, it requires that the data used must have some explanatory power. This explanatory

power to predict market value is defined as value relevance. The term value relevance is used now a dayswidely, for financial reporting standards, accounting variables, spending on intangibles etc. The issue ofvalue relevancy is very old in the literature of accounting and financial reporting. In early 90s the notionwas raised that information being reported by companies is becoming less relevant for investors. Thereare many models developed by scholars to determine the value relevancy. R-squared is most traditional

tool to check the relevance of an accounting variable to the market price of shares. This value relevance ismeasured in many ways; however there are three major types. This classification is used by many e.g.,Lambert (1996) and Holthausen and Watts (2001).

Relative association

Incremental association Marginal information content

Relative association studies find the value relevance in two different accounting paradigms. Usually

higher R-squared is categorized as more value relevant.Second type is the use of a set of some financial numbers in the regression analysis to predict share pricesand than if regression coefficient is significantly different than zero, it is assumed that these variables arevalue relevant.

Third Marginal information content technique finds that how much increase in information available tothe investors comes by adding another accounting measure.


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FINANCIAL REPORTING STRUCTURE IN PAKISTAN

Accounting has very old roots in the sub-continent. Gladwin (1796) shown that, in 1583 there was a

Hindu method of accounting before the adoption of Persian mode in Indo Pak. Hamiltons (1798) arguesthat Hindu method of accounting used by Bengali traders was a double entry system. After the emergence

of Pakistan in 1952 as a first walk toward the institutional development of the accounting profession, the

practicing accountants back then called registered accountants formed a private body known as thePakistan Institute of Accountants (PIA). In Pakistan parts of the reporting system are stock exchanges,

professional bodies for accounting, corporate law, and accounting standards framework. We explained allof these parts step by step.

On emergence of Pakistan in 1947, it received a falling down economy made of a prevalence ofagriculture, disordered transport system, huge immigrant troubles, deprived industrial legacy,

undeveloped banking and financial system, and negligible electricity. In view of its unstable economicconditions, the country was said to be Economic wreck and troubles and darkness was expected for

newly formed state. But Pakistan did survive at this stage and goes for economic development way byworking hard by its nation. In June 1959, the accountancy departments were formed to deal with the

profession of accounting in ministry of commerce instead of section officer. Consultative council was

established known as council of accountancy under auditors certificates rules 1950 as well this periodand suggested the formation of ICAP later in Pakistan.

Major institutions developed by the government of Pakistan and those established at the internationallevel affected the patterns of financial reporting in Pakistan. In Pakistan bodies which regulated theaccounting and reporting practices are following:

ICAP (Institute of Chartered Accountants Pakistan) SECP (Securities and Exchange Commission of Pakistan)

Karachi Stock Exchange, Islamabad Stock Exchange, and Lahore Stock Exchange

State Bank of Pakistan Companies Ordinance 1984

Code of Corporate Governance

In Pakistan the concept of accounting and reporting rules started with the emergence of ICAP, as it wasthe only body to regulate accounting in the country. In the absence of any standards and defined rules,ICAP issued its ATRs which are used for financial reporting as GAAP till now. ICAP council issued

some ATRs (Technical Releases) on some specific issues for defined financial reporting practices. ICAPhad its circulars regarding all proceedings made by it, and these ATRs are also issued with reference ofthese circulars. These circulars along with these ATRs worked as the interpretations of the accounting

practices. There are thirty one TRs in total. Nineteen of them have been withdrawn. Rest twelve iseffective till now. These TRs are complement to the accounting and reporting standards being followed

with the passage of time.

IASs in Pakistan: Adoption ParadoxThere is the contradiction on the issue of adoption of international accounting standards IAS). Pakistan

(ICAP) became the member of the IASC in 1974 it started to recommend the IASs issued by the IASCfrom 1986. This was the first time adoption of accounting standards. But this adoption was casual one dueto following reasons:

Only some of the companies adopted them at that time

Changes were made in these standards by ICAP required for local situation and needs Interpretation and many time explanations were issued for these standards for the

understandability


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We termed this adoption of IASs as the voluntary adoption as it occurred in other countries of world too.

But with the increased popularity, need and adoption by super powers, in 2005, EU issued the notificationfor the adoption of IFRS (new set issued continued after IASs), Pakistan (SECP) also issued a SRO

665(1)/2005 to re-notify the adoption of IASs adopted.

The term adoption is very much difficult to explain in this context. The first time adoption of IASs wasrecommended by the SECP in 1986 vide its S.R.O. 777(1)/86 on Aug 6,1986. However it is difficult todescribe when mandatory adoption began. Then later SROs were issued by SECP to notify the adoption

of other IASs in Pakistan, as issued gradually by IASB. The adoption was not from a single date.However the SECP in 2005 issued S.R.O. 665 (1)/2005 in exercise of the powers conferred by sub section(3) of Section 234 of the Companies Ordinance, 1984 on June 28, 2005. In this SRO, SECP withdrawnits SROs issued from 1986 to 2004, and notified the thirty one (31) IASs to be followed in preparationof financial statements. IAS were: 1, 2, 7, 8, 10, 11, 12, 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 26, 27, 28,

30, 31, 32, 33, 34, 35, 36, 37, 38, 39, and 40. In this way gradually all the IAS/IFRSs issued by the IASBhave been notified by SECP through different notifications. The date of notification issued by SECP and

the effective date are different. According to the ICAPs schedule of effective dates for revised and/orreformatted IAS/IFRSs only one standard is effective since 1984, one since 1994, one since 1988, two

since 1995, one since 1998, three in 1999, 13 in 2005, and of total 38 IAS/IFRSs.

We referred this adoption as mandatory adoption, as EU and U.S. announced it the mandatory adoption.

Our study is solemnly based on this classification of adoption. We conducted the statistical analysis onthe pre and post adoption basis, by assuming the mandatory adoption which got effective from 1st July,the start of fiscal year, in 2005.

LITERATURE REVIEW

During the last two decades the area of value relevancy acquired the larger attention and was addressed

by lot of research studies. This huge concentration was the result of beliefs emerged during 1990s that theaccounting information is becoming less value relevant. The first phase of studies conducted during the


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1990s attends to check the reasons of decreasing value relevancy and measures to improve it. Laterstudies concentrated on the effects of IAS/IFRS adoption on the value relevancy which began in 2005.Value-relevance entails the ability of the financial information enclosed in the financial reports toexplain the stock market measures; Vishnani & Shah (2008). Following given is the literature reviewed

on the value relevance of numbers and IAS/IFRS adoption.

Need for Harmonization of Reporting StandardsPeople who are in the favor of harmonized IAS claim that the same treatment or single set of rules for all

the countries will ensure the similar treatment of transactions by all the companies of different countriesthroughout the world. Nevertheless, the academic research challenge that how a single set of accounting

standards can be applied throughout the world who has countries with different political, social, andeconomic environment.

However, previous studies on IAS discoveries those firms are not compliant in meeting even the easilynoticeable disclosure requirements (Street and Gray 2001). Moreover, studies of the properties of

accounting output find that similar standards are applied very in a different way around the world (Ball,Robin and Wu 2003). But many studies findings prove that the its better to have same Accountingstandards instead of having different because it will help the global comparability of financial

information. Specifically, most authors point to either regulatory oversight or capital market pressures(Land and Lang 2002, Ball, Robin and Wu 2003, Burgstahler, Hail and Leuz 2006).

Supporters of harmonized international accounting standards argue that if all organizations use similaraccounting standards in their financial reporting, financial statements of business would be morestandardize and consistent disclosure and more helpful information to decision maker (e.g., Purvis et al,1991). Literature shows that complicated institutional elements effects financial reporting quality (e.g.,

Ball, 2001).

Impacts of IAS/IFRS AdoptionFinancial decisions and estimation of firms future financial performance is given to investors transparent

by IFRS (Street and Bryant, 2000) previous literature shows improvement due to adopting IFRS in

accounting quality of publicly traded European companies (E.g. Daske and Gebhardt, 2006; Barth et al.,2008). Therefore, IFRS adoption is likely to reduce exploitation in earnings and improve stock marketefficiency (Kasznik, 1999; Lenz, 2003). IFRS adoption is likely to develop transparency; disclosure and

comparability (Biddle and Saudagaran, 1989).

The adoption of IFRS would shrink asymmetric information consequently smooth the communicationamong the management, investors, and other stakeholders (Bushman and Smith, 2001) and that will resultin reduction of agency cost (Healy and Palepu, 2001) from this (El-Gazzar et al, 1999; Botosan and

Plumlee, 2002) says that decreasing asymmetric information will lead to reduction in cost of equity andcost of debt. After then it is again confirmed by Leuz and Verrecchia, (2000), they said that there are

proofs of IFRS adoption that leads to reinforces stock market liquidity and direct us to reduction in cost ofcapital, sot of transactions higher market value and better reputation. Adoption of IFRS is also likely to

impact positively on stock returns of company and stock relevant to financial performance measures(Guidry et al, 1999; Chung et al, 2002).

Most of academics of accounting recommended that IAS (International Accounting Standards) areconsidered more value relevant than GAAP prevailing domestic, high quality accounting standards and itssignificant predictability (Harris and Muller, 1999; Davis-Friday and Rueschoff, 1999; Lenz, 2003; Bao

and Chow, 1999) previous studies presents that code law countries, like European counties, where fundssupplied by state, banks or families likely to more crucial than in common law countries like North

America, where capital is supplied by private investors (La Porta et al., 1997) therefore those countieswhich have strong investor protection system like UK, the IFRS adoption cost is likely to be less than due


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to lever of earnings management is less as management is lower inclined to control the reported figures ofaccounting (Nenova, 2003; Dyck and Zingales, 2004; Renders and Gaeremynck, 2007). On other handthose countries which have comparative weak investor protection system, the financial reporting qualitywill be reduced because of more earnings management scope, reflecting the higher cost of IRS adoption

(Ali and Hwang, 2000; Hung 2001).

Evidence from studies on Reconciliation of Annual Reports from two different AccountingSetupsHarris and Muller (1999), using 31 companies, reconciled IFRS-US GAAP annual reports between 1992

1996 using Multiple linear regression (Earnings and Ohlson models). They found that reconciliations arevalue-relevant; IFRS are more closely associated with prices-per-share than US GAAP, but US GAAP ismore closely associated with returns than IFRS. Bartov et al. (2005), reconciled annual reports of 417companies (US GAAP, German GAAP and IFRS) from, 1998 to 2000; used linear regression. Theyfound that US GAAP and IFRS are more value relevant than German GAAP. Lin and Chen (2005)

reconciled annual reports of 415 companies (reconciliation of Chinese GAAP and IFRS) for 19952000using multiple linear regressions (Earnings and Ohlson model). They found Chinese GAAP more valuerelevant than IFRS. Schiebel (2006) reconciled annual reports of 12 German companies (GAAP andIFRS) from 2000 to 2004 using linear and exponential regression (panel data). He found German GAAP

more value relevant than IFRS. Niskanen et al. (2000) reconciled annual reports of 18 companies(reconciliation of Finnish GAAP and IFRS) for a period of 19841992 using multiple linear regressions(Earnings model). However, they found that reconciliations do not appear to be value-relevant. Ahmedand Goodwin (2006) analyzed the effect of adoption of IFRS in Australia. They found that IFRS earningsare higher than AGAAP earnings whereas AIFRS equity is lower than AGAAP equity, and more firms

have earnings decreases than increases. The effect on ratios is most significant for leverage where theAIFRS ratio is higher than AGAAP ratio. They also found that AGAAP reported financial information ismore value relevant compared to AIFRS reported financial information.

Contradictory Views from Value relevance ResearchesInspite of large evidence on the relevance of accounting information in share price determination,

criticism also exist on this issue. Critics dont condemn on the relevance of all the accounting numbers

but book value of equity and earnings. Barth (2000) includes the literature on criticism. This challengedthe use of the variables discussed above in standard setting process. These researchers argue that standard

setting can be improved with the extent to which accounting deals with the equity valuation.

Related previous studies in PakistanIn Pakistan, there is weak or no background for the value relevance and IAS/IFRS researches. To ourknowledge, no study for testing value relevance of accounting information is conducted yet. Even nostudy on the impacts of IFRS/IAS adoption is there. However there are some studies conducted on the

accounting developments, like Ashraf and Ghani (2005). This study did not include the empirical andeconometrical analysis. Except this study a recently published study of Malik (2011) addressed the valuerelevance of accounting information among major fundamentals in Pakistan. However it doesnt considerimpacts of IASs adoption by Pakistan. Use of accounting information for stock valuation as a model is

also not included in the study. It concluded that there earnings has highest statistical relationship withshare price.

Inferences Drawn from available LiteratureThe researches included, provide sufficient support for the current research in context of Pakistan. Theseresearches show that still there many conflicts, and contradictions. Ali and Hawang (2000) argued thatvalue relevance of accounting information is determined by country factors. So this study can findwhether the Pakistan, a developing country, with less involvement of private sector in standard setting,has value relevant financial information. There is no previous research for this issue. Results of previous


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studies are conflicting and generate the need for further studies. So keeping all these facts in view, werecommend this study to be conducted. The fact of less or no well defined body of knowledge related tothe impacts of IAS/IFRSs in Pakistan encourages researcher.

RESEARCH METHODOLOGY

The study has three variables, two independent and one dependent variable. Independent variables areEarnings and Book value. The dependent variable is Market Value. Share price is taken for the companiesafter three months of the financial year end. Book Value was calculated as total equity of the firm less

preference equity divided by the total numbers of shares outstanding. EPS is the simply earnings for pershare outstanding, calculated as net income available for ordinary shareholders divided by numbers ofordinary shares outstanding.Variables are selected on the basis of literature reviewed, Kadri, Aziz and Mohamed, (2009); Callao,Jarne and Lainez (2007); Gaston, et al. (2010) and many others also commented that these variables are

best used in technical analysis due to more explanatory power for market value of shares. Using BVPSand EPS for testing value relevance is a natural place to look for the impact of accounting standards onreporting quality.

Following hypotheses are formulated to test statistically:

a. MVPS is significantly determined by the BVPS and EPS for whole study period data.b.

MVPS is significantly determined by the BVPS and EPS for before adoption study period data.c. MVPS is determined represented by the BVPS and EPS for after adoption study period data.

Based on the previous literature and variables under study following hypothesis are designed. Thesehypotheses can be categorized in the following way:

To draw the inference about the impact of IAS/IFRSs adoption on value relevance of financial

information (BVPS and EPS) the study used a systematic way of sampling. Sampling is based on themarket capitalization of firms at the day of analysis. We determine the weights of each sectors

capitalization towards the total economy. Then arrange the companies within a sector on the basis of theirproportionate market capitalization. Companies are selected from a sector on the basis of the proportionof that sector to total economy. In this way fifty two (52) largest companies are included in the analysis.

Required data was collected from the annual reports of the companies and the balance sheet analysisreports for joint stock companies issued by the State Bank of Pakistan. Directives of the SECP and ICAPwere also be used. KSE website was used to gather market prices of shares for three months later thefinancial years.

The data will be processed and analyzed through any statistical package e.g. SPSS and Minitab.Regression test will be performed to infer the impact of IASs adoption on value relevance of book valueand earnings. Regression analysis will be conducted at three levels, first for whole study period, second

for before adoption and third for after adoption. Evidences show that 42% of total IAS/IFRSs are adoptedby ICAP in 2005. So the results of three stage regression analysis will be compared to check whetherIASs adoption in 2005 affected the value relevancy of financial information of selected PLCs. In this

regard a pre (2002-04) and post (2005-09) analysis is conducted.

In study we conducted the analysis for 8 years data. 4 Years are treated before period and 4 years are after

period. Detail is provided in the following table. We used the Ohlson (1995) to investigate the impact ofIAS adoption on value relevance of BVPS and EPS. The model can be illustrated using a linear function:

MVPS = a + b1 [BVPS] + b2 [EPS] Eq. 1


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Where MVPS is Market value, BVPS is Book Value, EPS is earnings, a is constant and b isthe slope. Following statistical techniques are used to test our hypothesis:

OLS (Ordinary Least Squares) Regression for simple firm-year data

Panel Data Regression (Fixed Effects) for firms included in analysis

EMPIRICAL FINDINGS AND CONCLUSIONS

Hypotheses are tested at two stages. At first regression analysis is conducted through the Excel usingfirm-years data. Then in second step same analysis is conducted through Gretl using panel dataapproach.

Regression tests are performed to identify the relationship between dependent variable and independentvariables. Book value and earnings are said to be value relevant if the relationship between market value,

book value and earnings are significant. Book value and earnings are not value relevant if the relationshipwith market value is not significant. A few tools are used to measure the relationship between marketvalue, book value and earnings. First, R is used to find the correlation between market value and book

value. Second, R2 indicates how many percent of the variation in dependent variable is explained by

independent variables. Third, adjusted R2measures the goodness of model fit. In addition, p-value is usedto measure whether individual independent variables are significant or not, a p-value of 0.05 and below

shows that individual independent variable is significant.

OLS RegressionFor the hypothesis i, MVPS is significantly determined by the BVPS and EPS for whole study perioddata following summary and outputs are given by Excel:

Table 1: OLS Regression Results for overall study period

Multiple R 0.67

R Square 0.45

Adjusted R Square 0.45

P-value of BVPS 0.00P-value of EPS 0.00

Equation MVPS = 35.4 + 0.390 BVPS + 5.42 EPS

Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2and adjusted R

2

value shows that there is the significant value relevancy in the amounts for BVPS and EPS during wholestudy period by using 8 years data. So we accept our hypothesis i. P-value is below than 0.05 and R2

value also shows the model fitness.

For the hypothesis ii, MVPS is significantly determined by the BVPS and EPS for before adoptionstudy period data, following summary and outputs are given by Excel:

Table 2: OLS Regression Results for before adoption periodMultiple R 0.64

R Square 0.41


P-value of BVPS 0.00

P-value of EPS 0.00



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Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2and adjusted R2value shows that there is the significant value relevancy in the amounts for BVPS and EPS during beforeadoption period by using 4 years data. So we accept our hypothesis ii. P-value is below than 0.05 andR2value also shows the model fitness.

For the hypothesis iii, MVPS is determined represented by the BVPS and EPS for after adoption study

period data, following summary and outputs are given by Excel:

Table 3: OLS Regression Results for after adoption period

Multiple R 0.74

R Square 0.55



P-value of EPS 0.00


Table shows that there is significant relationship between the BVPS, EPS and MVPS. R2and adjusted R

2

value shows that there is the significant value relevancy in the amounts for BVPS and EPS during after

adoption period by using 4 years data. So we accept our hypothesis iii. P-value is below than 0.05 andR2value also shows the model fitness.

As per regression analysis using firm-years data we can make some inference for our hypotheses, degreeof determination for the fitted model is greater during after adoption period. Adjusted R-square is 40.44 %for before adoption period, its 55.09 % for after adoption period. So we conclude that value relevance has

increased after the adoption of selected international accounting standards.

Panel data Regression, Fixed Effects Model (FE)Same hypothesis are tested again by using a more sophisticated technique named as Panel regression. The

simple difference between the OLS (Ordinary Least squares) regression and panel regression stands indata orientation used. OLS uses the data as cross sectional. However the observations are taken by the

panel regression are considered for cross sectional plus time series at the same time. By using panelregression, software is able to differentiate between the values of one cross sectional unit to other. In thisway analysis yields the overall relationship between the variables on both the dimensions.

Panel regression technique is divided into normally three types. These three types include Fixed Effects

Model, Random Effects Model, and Pooled OLS, which is usually referred as LSDV (Least SquaresDummy Variable Analysis). We chose the FE model for our research. This model is used to generalizethe effects on the given sample units. It is also used to control unobserved heterogeneity.

For the hypothesis vii, MVPS is significantly determined by the BVPS and EPS for whole study period

data following summary and outputs are given:

Table 4: Panel Regression (FE Model) Results for whole study period

R-squared 0.73

Adjusted R-squared 0.69


P-value of EPS 0.00

Equation MVPS = 80.3588 + 0.347256BVPS + 3.02193EPS


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Table shows that whole study period data has significant value relevancy in the BVPS and EPS figures.However it should be noted that there is improved result for R-squared and Adjusted R-squared afterusing the panel approach (fixed effects model). So we dont reject our hypothesis i.

For the hypothesis ii, MVPS is significantly determined by the BVPS and EPS for before adoptionstudy period data, following summary and outputs are:

Table 5: Panel Regression (FE Model) Results for before adoption study period

R-squared 0.80



P-value of EPS 0.14


Table shows that before adoption study period data has significant value relevancy in the BVPS and EPSfigures. However it should be noted that there is improved result for R-squared and Adjusted R-squared

after using the panel approach (fixed effects model). So we dont reject our hypothesis ii.

For the hypothesis iii, MVPS is significantly determined by the BVPS and EPS for before adoptionstudy period data, following summary and outputs are:

Table 6: Panel Regression (FE Model) Results for after adoption study period

R-squared 0.91



P-value of EPS 0.00

Equation MVPS = 149.383+0.0305345 BVPS+2.89566 EPS

Table shows that after adoption period data has significant value relevancy in the BVPS and EPS figures.However it should be noted that there is improved result for R-squared and Adjusted R-squared after

using the panel approach (fixed effects model). So we dont reject our hypothesis iii.

On the basis of overall panel regression can infer that degree of determination for the fitted model isgreater during after adoption period. Above tables show that value relevancy is higher during afteradoption period data. Adjusted R-squared is higher for after adoption period (87.51%) than before

adoption period (72.88%).

CONCLUSIONS

Research on value relevance of accounting numbers is not new. The application of the model to see theeffects of IFRS/IAS on value relevance of accounting numbers is not also new. However the research onthe effect of IFRS/IAS on accounting numbers in Pakistan is still new. Current study investigates theeffect of adoption of IFRS/IAS on value relevance of book value and earnings of Pakistani PLCs under

two different situations. Based on the results of the study a few conclusions can be made: First, it shows that book value and earnings of selected Pakistans PLCs are value relevant

throughout the period under study.

Second, the results also show that book value and earnings of firms are more value relevantduring the IFRS/IAS adoption period than before mandatory adoption period. This might be due

to the introduction of fair value related new reporting standards. Third, this study has proven that in the short run the introduction of IFRS/IAS leads to narrower

gap between market and book value.


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Fourth, the financial information provided in annual report is more relevant in making investmentdecision.

Country related factors as discussed by the Ali and Hawang (2007) are seemed to be less affecting incontext of Pakistan. IAS adoption is beneficial for investors and analysts of fundamental analysis, by

providing value relevant financial information. ICAP should continue to adopt the standards issued by theIASB. All the newly issued IFRSs should also be adopted soon. ICAP should also facilitate the adoption

process and make it sure that adoption is being made at once. Implementation guidance would increasethe quality of financial reporting in the corporate sector of Pakistan.

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Appendix 1: Statistics of Sampling ProcessSectors X1 X2 X3 X4 X5 X6 X7 X8 X9

Cotton Textile sector167 31

125 7% 8 2 16 4 12

Other Textile Sector 11 2% 0 2 0 0 0

Chemical Sector 34 5 29 23% 7 2 14 6 8

Engineering Sector 38 3 35 8% 3 2 6 0 6

Sugar Sector 35 4 31 2% 1 2 2 1 1

Paper and board sector 9 3 6 1% 0 2 0 0 0

Cement Sector 20 4 16 5% 1 2 2 0 2

Fuel and Energy Sector24 3 21 19% 4 2 8 2 6

Transport and Communication Sector 7 2 5 8% 0 2 0 0 0

Tobacco Sector

67 14

3 1% 0 2 0 0 0

Jute Sector 3 1% 0 2 0 0 0

Vanaspati and Allied Industries Sector 3 0% 0 2 0 0 0

Miscellaneous Sector 44 25% 11 2 22 5 17

Total 401 69 332 100% 35 - 70 18 52

X1: Companies that remained listed during whole study period, X2: Companies not having Data for

Independent Variables, X3: Companies Qualified for Sampling, X4: Proportion of Sector toward Total

Market Capitalization, X5: No. of Companies Selected, X6: Multiplier for margin, X7: No. of Samplecompanies from each sector, X8: Companies for which Market Values are not available, X9: Companiesincluded in the analysis.


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Appendix 2: List of Companies included in the Analysis

Gul Ahmed Textile Mills Ltd.Indus Dyeing & Manufacturing Co. Ltd.

Nishat (Chunian) Ltd.

Sapphire Fibres Ltd.Sapphire Textile Mills Ltd.Artistic Denim Mills Ltd.Fazal Cloth Mills Ltd.Fazal Textile Mills Ltd.

Gadoon Textile Mills Ltd.Masood Textile Mills Ltd.Quetta Textile Mills Ltd.Mahmood Textile Mills Ltd.Abbott Lab. (Pakistan) Ltd.

Dawood Hercules Chemicals Ltd.GlaxoSmithKline Pakistan Ltd.

ICI Pakistan Ltd.Engro Corporation Limited (Engro ChemlPakistan Ltd.)

Ferozsons Laboratories Ltd.Searle Pakistan Ltd.Sitara Chemical Industries Ltd.Al-Ghazi Tractors Ltd.Indus Motor Company Ltd.

Millat Tractors Ltd.International Industries Ltd.Atlas Honda Ltd.Siemens Pakistan Engineering Co. Ltd.

JDW Sugar Mills Ltd.Lucky CementD.G Khan Cement Company Ltd.Karachi Electric Supply Company Ltd.

National Refinery Ltd.

Sui Southern Gas Company Ltd.Mari Gas Co. Ltd.Kohinoor Energy Ltd.Altern Energy Ltd.Bata Pakistan Ltd.

Ghani Glass Ltd.Ismail Industries Ltd.

National Foods Ltd.Nestle Pakistan Ltd.Pakistan Services Ltd.

Rafhan Maize Products Co. Ltd.Treet Corporation Ltd.Tri-Pack Films Ltd.Service Industries Ltd.Murree Brewery Company Ltd.

Shifa International Hospital Ltd.Gillette Pakistan Ltd.

Shezan International Ltd.Shabbir Tiles and Ceramics Ltd.Clover Pakistan Ltd.

Mitchell's Fruit Farms Ltd.


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