Testing Value Relevance of Accounting Earnings in Emerging Markets

Abstract

Relevance of accounting earnings for market value of companies has been subject to numerous empirical studies, which generally support the hypothesis of value relevance in developed countries. Recently a growing number of papers focus on the usefulness of accounting information in emerging countries. These studies adopt value relevance methodology to test for the association between accounting earnings reported by listed companies, and the value of their equity: a positive result of the test serves as proof of the quality of accounting standards, accounting practice and the local stock market. The aim of this paper is to discuss theory and methodology of these tests in order to determine a set of guidelines for value relevance testing. A number of alternative models are estimated on a common data set and compared. Results show that model selection has a significant impact on value relevance tests and inferences as to the quality of accounting information.

Keywords: value relevance, accounting earnings, equity valuation

JEL Classification: M41