The background of survey, job statement, research aims and inquiries are established and discussed in the old chapter. The chief aim of this chapter is to reexamine relevant past surveies related to the value relevancy of reported fiscal information. First past empirical surveies on value relevancy of book value of equity, net incomes and between net incomes and runing hard currency flow are reviewed exhaustively and go on with the treatment of conceptual foundation together with the proposed research theoretical accounts adopted from past surveies. At the terminal of this chapter, some hypotheses are developed based on the past researches.
2.1 Review of the Prior Empirical Surveies
2.1.1 Association between Book Value of Equity ( BVE ) and Market Value of Equity ( MVE )
Many surveies have been conducted on the relevancy between the market value of equity and both net incomes and book values which affect the utility of fiscal statement. These surveies are conducted by Kadri et Al. ( 2009 ) ; Shamy and Kayed ( 2005 ) ; Gallizo and Salvador ( 2006 ) . A Gallizo and Salvador ( 2006 ) defined that one of the chief countries of empirical research in accounting is value relevancy. Value relevancy is the association between market value of equity and accounting Numberss ( Kothari, 2001 ; Barth et al. , 2001 ) . It tests the relationship between market value of equity and both net incomes and book values.
Most of the surveies ( Shamy et al. , 2005 ; Kadri et al. , 2009 ; Jamaluddin, Mastuki, & A ; Ahmad, 2009 ; Gallizo et al. , 2006 ) utilized the Ohlson ( 1995 ) theoretical account ( OM ) to look into the value-relevance of the book values of equity of the company. Shamy et al. , ( 2005 ) assessed the value relevancy between market values of equity and book values to investors based on the statistical association. These writers aim to look into whether book values of houses are value relevant and whether a alteration in fiscal coverage criterions would impact the value relevancy of book values. Shamy et Al. has selected 31 listed houses in the Kuwait Stock Exchange to prove the value relevancy between book value and stock monetary value utilizing OM. The consequence showed that there is a positive and important association between book value and market monetary value.
Kadri et Al. ( 2009 ) studied whether the book value of the houses is value relevancy and whether a better quality of fiscal statements is available to the investors if a strong theoretical account relationship is established. Equity rating theoretical account as suggested by OM is used to look into the consequence on value relevancy of book value after the alteration in accounting criterions. They selected informations from Thomson Data Stream of belongings sector houses which comprises 59 companies listed on Bursa Malaysia. The information was collected from twelvemonth 2002 to 2007 whereby twelvemonth 2002 to 2005 is the period with old accounting criterions while twelvemonth 2006 to 2007 is the period for new accounting criterions. The surveies concluded that book value and other fiscal Numberss are value relevancy during the old accounting criterions. In contrast, merely book value is value relevancy after the debut of the new accounting criterions. However, there are some old surveies demoing mix consequences such as Harris and Muller ( 1999 ) and Lin and Chen ( 2005 ) as cited by Kadri et Al. ( 2009 ) .
Gallizo et Al. ( 2006 ) studied the relevancy of accounting variables ( book values ) to explicate the influence of the book values on the development in the market monetary value. The writers obtained a sample of 2164 houses from the Worldscope database which consists of US listed houses on the NYSE from twelvemonth 1992 to 2000. Kothari ‘s ( 1992 ) change-based attack was used to set up the arrested development equations to associate the fluctuation in monetary value with the alterations in book value. The consequence showed that book value has a important association against the development of market monetary value.
Another survey had been conducted in Malaysia by Pirie and Smith ( 2008 ) from Australia. The writers stated that many of the early researches are focused chiefly on net incomes, but tendency has changed to include equity book value as an extra accounting variable. Besides, with an increasing attending on value creative activity, most of the houses are utilizing residuary income steps as their indexs of fiscal public presentation. Therefore, the intent of this research is to analyze the relationships between market value and accounting variables in equity markets around the universe whereas the determination of an empirical survey is conducted in Malaysia. Three theoretical accounts were explained by the writers which are dividend price reduction theoretical account, residuary income theoretical account and OM. However, merely OM is adopted as their theoretical models are hard to be applied since other theoretical accounts required an estimation for an indefinite period of clip. Therefore, in order to run the theoretical account with big samples and with minimal choice prejudice, all houses regardless of industry sector, fiscal year-end or any other conditions are taken from the Disclosure Wordscope database which covers ten old ages period from 1987 to 1996. Therefore, the full sample in the Malaysia market involved 1,792 houses and trimmed sample merely involved 1,705 houses. As a consequence, Pirie and Smith ( 2008 ) found that the coefficient on book value is positive and extremely important indicates that book value is value relevancy and have incremental explanatory power for market value in the Malayan market.
2.1.2 Association between Earnings ( E ) and MP
Shamy et Al. ( 2005 ) used a rating theoretical account provided by Ohlson ( 1995 ) to mensurate the value relevancy between net incomes and market monetary values to measure the utility of fiscal information to investor. This survey made a comparing on the entire information in the market topographic point by utilizing the information of listed companies in the Kuwait Stock Exchange in which net incomes and market monetary values are available for the survey period 1992-2002. Therefore, the sample consisted of 31 to 75 houses per twelvemonth and the consequence demoing that the earning are positively and significantly related to market monetary values and it is consistent with other findings.
Besides, Kwon ( 2009a ) had investigated the comparative and incremental value relevancy of net incomes in security monetary values which used Myers, Ohlson ( 1995 ) and Feltham and Ohlson ( 1995 ) rating theoretical account. There were 4,865 steadfast twelvemonth observations in the period from 1994 to 2005 which obtained from the KIS-FAS ( Korea Investors Service-Financial Analysis System ) and KISRI ( Korea Securities Research Institute ) stock databases. However, the research excluded the fiscal banking concern houses and damage of capital houses and the consequence showed that the net incomes play no important functions in security monetary value.
However, in another Kwon ( 2009b ) research, the research worker investigated the value relevancy of net incomes in security monetary values from 1982 to 2001 in Korean stock market that consists of 7,928 firm-year observation which uses option-style theoretical account of equity. However, the survey excludes the fiscal banking concern houses and the consequence showed that the value relevancy of accounting net incomes differed between loss houses and net income houses.
Harmonizing to Kanagaretnam et Al. ( 2009 ) who did a survey in Canada in twelvemonth 2009 on just value accounting of fiscal instruments, they proved that the alteration in the just value of the available-for-sale investings constituent of other comprehensive income is more strongly associated with market monetary value. This is because the needed houses need to describe certain fiscal instruments at just value and recognized the alterations in their values as keeping additions or losingss temporarily in other comprehensive income until temperament ( available-for-sale investings ) which would so recognized in net income.
2.1.3 Association between Operating Cash Flow ( OCF ) and E
Finger ( 1994 ) studied the value relevancy of net incomes and runing hard currency flow by proving net incomes ‘ ability to foretell hereafters runing hard currency flow. The writer tested the ability of net incomes to foretell future hard currency flow by utilizing eight old ages data from 1935-87 for 50 houses. These 50 houses accounting informations were collected from the Compustat Annual Industrial File from 1968-87 and supplemented with hand-gathered one-year study information from 1935-67. Time-series method was used to prove the prognostic ability over the full clip period. The consequence was so compared with out-of-sample prognosis mistakes to obtain extra grounds of net incomes ‘ ability to calculate future runing hard currency flow. Finger ( 1994 ) found that net incomes are a important forecaster of operating hard currency flow for the bulk of the houses. But, out-of-sample prognosis showed that net incomes seldom better hard currency flow prognosiss as the consequence indicated that net incomes help foretelling hard currency flow but did non back up the FASB statement that net incomes are a better forecaster of hard currency flow ( Finger, 1994 ) .
Another survey had been done by Kim and Kross ( 2005 ) to look into the relationship between net incomes and runing hard currency flow from twelvemonth 1973 to 2000. The writers adopted clip series arrested developments model to analyze the ability of net incomes to foretell operating hard currency flow over the past 28 old ages. Therefore, entire sample of 100,266 observations were drawn from the one-year Compustat industrial, full coverage, research and monetary values, dividends, and net incomes ( PDE ) files running from 1972 through 2001. They found that relationship between current net incomes and future hard currency flows has by and large been beef uping over clip. Kim and Kross ( 2005 ) augmented this grounds with out-of-sample prognosiss of operating hard currency flows and increasing accounting conservativism has been taking into considerations in this research.
Ahmed and Goodwin ( 2006 ) investigated the relationship between net incomes and runing hard currency flow in order to analyze the value relevancy of book value and net incomes. Harmonizing to the writers, high quality of fiscal statement means value relevancy. The writers besides use the same theoretical account used by Kadri et Al. ( 2009 ) . The research found that net incomes during the old accounting criterions may hold better anticipation of operating hard currency flow if compared to new accounting criterions one. Reasons for this determination are: ( 1 ) investors see new accounting criterions as it produces a weaker balance sheet and ( 2 ) new accounting criterions produce a big diminution in maintained net incomes, which implies reduced dividend paying capableness.
Relationship between net incomes and runing hard currency flow is examined by Kadri et Al. ( 2009 ) under two different fiscal coverage criterions in Malaysia. The stronger the relationship between net incomes and runing hard currency flow increases the value relevancy and enhances the quality of fiscal statement. This survey examines the two variables via non-market rating theoretical account over the execution of different accounting criterions. This theoretical account was used to look into whether net incomes are relevant in explicating operating hard currency flow. Their consequences indicated that net incomes have important relationship with operating hard currency flow but no important alteration due to the alteration in the fiscal coverage criterions.
2.1.4 Changes in Value Relevance due to Changes in Financial Reporting Standard
Many surveies have been conducted by past research workers to analyze the value relevancy of accounting Numberss after the acceptance of International Financial Reporting Standards ( IFRS ) in all over the universe. Among the researches are Harris and Muller ( 1999 ) , Lin and Chen ( 2005 ) , Bartov, Goldberg and Kim ( 2005 ) and Lau ( 2010 ) . Their findings are inconsistent from each other because the researches were done in different state. The difference of context and background of each state such as economic system, political system, regulations and ordinance imposed and the societal cultural of the citizens could take to the incompatibility. The undermentioned surveies are organised harmonizing to the findings.
First, there are some old surveies found mix consequences such as Lin and Chen ( 2005 ) and Harris and Muller ( 1999 ) . Lin and Chen ( 2005 ) investigated the incremental value relevancy of the rapprochement of histories from the Chinese Accounting Standards ( CAS ) to the International Accounting Standards ( IAS ) by those Chinese listed companies that had issued stock A and stock B. The analysis used multiple additive arrested developments and consists of 415 companies that published their fiscal statements from twelvemonth 1995 to 2000 in China and the consequences showed that the accounting Numberss under CAS were more relevant for stock A and IAS accounting Numberss were more value relevant for stock B.
Harris and Muller ( 1999 ) besides found mix consequences. The intent of their survey is to prove the value relevancy of US GAAP and IFRS. They reconciled and analysed one-year studies of 31 companies that met the IFRS and US GAAP demands during 1992 to 1996. Ohlson theoretical account and net incomes theoretical account were used in their survey. Harris and Muller ( 1999 ) found that different theoretical accounts provide different consequences. By utilizing Ohlson theoretical account, they found that fiscal statements prepared under IFRS are more value relevancy than US GAAP. Besides, they besides found that IFRS accounting Numberss are more extremely associated with monetary value per portion compared to US GAAP accounting Numberss. But, when net incomes theoretical account was used, they found that US GAAP accounting Numberss are more extremely associated with returns than IFRS accounting Numberss.
Second, we discovered that some surveies found either local criterions or IFRS to be more value relevant. In Malaysia, Lau ( 2010 ) studied the value relevancy of accounting information and fiscal coverage among houses across the three describing periods with different degrees of the IFRS acceptance. The research worker used Ohlson theoretical account to prove the value relevancy of fiscal coverage and a period of 15 old ages ( 1993-2007 ) was selected for the analysis. The 15-year period was divided into Pre-MASB ( 1193-1998 ) , Post-MASB ( 1999-2005 ) and IFRS Convergence ( 2006-2007 ) . Therefore, the studt consisted 5,517 firm-year observations from the 491 public houses that were available in DataStream Advance Database which listed in the Bursa Malaysia as of 2008 and the consequences concluded that the IFRS is value relevant for determination devising among the investors.
Bartov et Al. ( 2005 ) on the other manus studied comparative value relevancy under German GAAP, US GAAP or IFRS. They examined the one-year studies of 417 German companies that published to the full amalgamate fiscal statement from 1998 to 2000 which obtained from the fiscal and industrial active and issue files of the 2000 Global Vantage. When they used additive arrested development theoretical account, they found that fiscal statement prepared under US GAAP or IFRS provided better information than fiscal statement prepared under German GAAP. This means that US GAAP or IFRS is more value relevant than German GAAP. This is because German GAAP has less concern on investors ‘ involvements and therefore less focal point in future hard currency flow.
By mentioning to these determination, inquiry raised whether acceptance of FRS is more value relevant on accounting Numberss compared to old criterion.
2.2 Conceptual Foundation
Over the old ages, legion yesteryear research workers have adopted the well-established Ohlson theoretical account ( OM ) as their theoretical model in accounting research to analyze the value relevancy of portion monetary value comparatively to accounting variables that are presently available in fiscal statement. It presents a concrete and complete model to gestate how the market value relates to amount of accounting informations and other information recognized or disclosed in fiscal statement ( Ohlson, 1995 ) . Lo and Lys ( 2000 ) commented that bulk of the past surveies rely on OM obtained strong linkage ( high R2 ) between value alteration and accounting information. This theoretical account is besides used to analyze on the steadfast failure anticipation in China ( Ying & A ; Michael, 2010 ) .
The 2 cardinal independent variables are book value and net incomes. This is supported by the findings of Collin et Al. ( 1997 ) who claimed that the joint explanatory power of earning and book value is increasing somewhat over the four decennaries although they experienced systematic alteration over clip. Kadri et Al. ( 2009 ) have further developed the OM and turn out that BE and E of Malaysian belongings houses are value relevancy. The theoretical account shown that E and BVE offer high explanatory power which implied the BV and E contain information relevancy to investors.
MVEit = a + a1Eit + a2BVEit + eit
The 2nd theoretical account, non-market rating theoretical account ( Finger, 1994 ; Ahmed and Goodwin, 2006 ; Kadri et Al. 2009 ) has proven that the alteration of accounting criterion will hold impact on the relationship between runing hard currency flows ( OCF ) and net incomes ( E ) . Past empirical survey showed that net incomes offers better anticipation of future runing hard currency flows than current runing hard currency flows ( Dechow, Kothari, & A ; Watts, 1998 ) .
OCFit = a + a1Eit + eit
Therefore, these 2 theoretical accounts serve as the foundation for this survey. The current survey intends to look into the consequence of acceptance of FRS 139 on value relevancy of book value and net incomes of Malayan utilizing equity market rating theoretical account which is found by Ohlson ( 1995 ) . In add-on, the non-market rating theoretical account was used to compare the relationship between net incomes and runing hard currency flow of houses ‘ pre- and station acceptance FRS 139 samples.
2.3 Proposed Research Models
Adapted from Finger ( 1994 ) ; Ohlson ( 1995 ) ; Ahmed et Al. ( 2006 ) ; Kadri et Al. ( 2009 )
We foremost adopted the Equity Valuation Model adopted from Ohlson ( 1995 ) ; Kadri, et Al. ( 2009 ) to analyze the value relevancy of market value comparatively to both book value and net incomes as shown in Table 2.1
Where, MVEit, is the market value of house I equity at the terminal of the one-fourth T, Eit is the net incomes of the house I for the one-fourth T under pre-adoption FRS 139 or post-adoption FRS 139, BVEit is the book value of the house I equity under pre-adoption FRS 139 or post-adoption FRS 139 and eit is the mistake.
In Model 1a, the lone different is we added two dummy variables to stand for the effects of acceptance of FRS 139. Eit*PFRS ( net incomes times FRS 139 ) represents the interaction between net incomes and FRS 139 while BVEit*PFRS ( book value equity times FRS139 ) represents the interaction between book value net incomes and FRS 139. Pre and station acceptance of FRS ( PFRS ) is represented by nominal value of ‘0 ‘ for pre-FRS 139 acceptance and ‘1 ‘ for post-FRS 139 acceptance. If there is an addition in value relevancy of net incomes and book value after the acceptance of FRS 139, the Eit*PFRS and BVEit*PFRS will hold important p-value.
We further look into the consequence of acceptance FRS 139 on value relevancy of net incomes and book values by separate the Model 1a into Model 1b and Model 1c. Model 1b represents value relevancy of net incomes and book values of house I for pre-adoption of FRS 139 while Model 1c represents the consequence after the acceptance of FRS 139. Model 1b and Model 1c are shown in Table 2.1. Where, MVEit, Eit, BVEit, and eit are defined in Model 1.
In this survey, we besides adopted non-market rating theoretical account stated by Finger ( 1994 ) ; Ohlson ( 1995 ) ; Ahmed et Al. ( 2006 ) ; Kadri et Al. ( 2009 ) to analyze net incomes ‘ ability to foretell operating hard currency flow. This theoretical account is represented by runing hard currency flow ( OCF ) where net incomes is said to be value relevancy if it has a important relationship with OCF. This theoretical account ( Model 2 ) is shown in Table 2.2.
Where, OCFit is runing hard currency flow for the house I at the terminal of the one-fourth T, while Eit and eit are defined in Model 1. In order to look into whether at that place has any alterations on the relationship between operating hard currency flow and net incomes after the acceptance of FRS 139, Model 2a is developed.
Here, we added dummy variables to represents the interaction between net incomes and pre-adoption FRS 139 and post-adoption FRS 139. OCFit, Eit, Eit*PFRS and eit are defined antecedently in Model 1 and Model 2.
Then, we further look into the consequence of acceptance of FRS 139 on net incomes ‘ ability to foretell operating hard currency flow by utilizing Model 2b and Model 2c where, OCFit, Eit, and eit are defined antecedently.
2.4 Hypothesis Development
In line with the survey ‘s aim to analyze the consequence of acceptance of FRS on value relevancy of reported fiscal information, there are a few hypotheses were developed for this research based on Kadri ( 2009 ) and other old surveies.
H1: Execution of FRS 139 has important consequence on value relevancy of book value in Malayan Public Listed Companies ( non-financial ) .
H2: Execution of FRS 139 has important consequence on value relevancy of net incomes in Malayan Public Listed Companies ( non-financial ) .
H3: Execution of FRS 139 has important consequence on relationship between operating hard currency flow and net incomes in Malayan Public Listed Companies ( non-financial ) .
From the above literature reappraisal, most research workers conclude that acceptance of different accounting criterions ( local criterions to IFRS ) could impact the relationship between market value, book value, gaining and hard currency flow while some others found mix consequences. Therefore, we come out with a proposed research theoretical accounts and research hypotheses trying to prove whether there is a important alteration in value relevancy between market value, book value and gaining and between gaining and hard currency flow. Following, the treatment proceed to methodology detailing the methods to prove the hypotheses.