International Business & Economics Research Journal – January 2011 Volume 10, Number 1

The Usefulness Of Earnings And Book

Value For Equity Valuation To Kuwait
Stock Exchange Participants
Mishari Alfaraih, Public Authority for Applied Education and Training, Kuwait
Faisal Alanezi, Public Authority for Applied Education and Training, Kuwait

ABSTRACT

Motivated by the lack of research on the value relevance of accounting information in emerging
markets and the unique institutional setting in Kuwait, the objective of this study is to examine the
value relevance of accounting earnings and book value information produced by Kuwait Stock
Exchange (KSE)-listed firms during the 1995-2006 period empirically by using two valuation
models - price and returns models. The results of both models show that earnings and book value
were, jointly and individually, positively and significantly related to stock price and stock returns.
Interestingly, the value relevance of earnings and book value of KSE-listed firms were found to be
higher than the findings observed in some developed and emerging countries. This finding could
be attributed partially to the fairly limited sources of credible and useful competing information
available to market participants and the lack of alternative sources of information about
prospects. An important implication of this finding is that the KSE needs to develop its information
environment further to become more efficient in offering a free exchange of information about
companies listed on its exchange.

Keywords: value relevance; International Financial Reporting Standards; emerging markets

INTRODUCTION

T he primary objective of value relevance research is to investigate whether the financial statements
that companies produce provide investors and other users both high-quality and valuable accounting
information that enables them to make informed decisions. The value relevance of accounting
information is a major concern for investors, regulators and other users of financial reports, and is a popular study
area for accounting researchers. Over the last 10 years, it has been a primary area of capital market–based research
(Beaver, 2002).1 Accounting information is expected to provide investors and other users of financial statements
useful information to help them make informed economic decisions. Unfortunately, accounting theory does not
directly address the role of accounting information in emerging markets (Lopes, 2002). However, it could be argued
that accounting information is less relevant in these markets because stock prices may fail to reflect completely all
available company information due to a range of market imperfections. For example, information asymmetry could
be severer in emerging markets than developed markets because information sources are fewer. However, this
makes accounting information potentially more important and powerful for participants in emerging markets than
other sources of information in more developed markets (Lopes, 2002).

Since the seminal work of Ball and Brown (1968), most of the literature on the value relevance of
accounting information has comprehensively documented the statistical association among earnings, book values
and stock prices (or stock returns). This literature includes Barth & Clinch, 1996; Collins et al., 1997; Francis &

1
Value relevance research examines the association between stock price (returns) as a dependent variable and a set of
independent accounting variables (e.g., earnings, book values, and cash flows). An accounting variable that is found to have a
significant statistical association with the dependent variable stock price (returns) is considered value relevant from an investor’s
perspective (Beaver, 2002).
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Schipper, 1999; and Chen et al., 2001. However, much of this literature has centred on developed markets, with
little attention given to emerging markets. The value relevance of accounting information in developed countries
may be different than in less developed countries (Graham et al., 2000), which have different economic, social, and
cultural characteristics. Empirical research on the role of accounting information in emerging markets can
investigate these issues and enhance our understanding of this role. To date, however, very little research has
investigated the particular importance of accounting information to emerging markets. This study seeks to redress
this gap by examining the Kuwait’s emerging market and its value relevance issues.

Indeed, one might assume that the value relevance of accounting information in less developed is generally
lower than in well-developed markets (Hellstrom, 2006). However, in Kuwait, sources of credible and useful
accounting information are limited, so the role of financial statements may be more important. Thus, their influence
on the stock market may be more significant than in developed countries. For example, the Kuwaiti financial market
does not have the same level of press coverage as the US or other western countries. Bushee et al. (2007) argue that
press coverage significantly affects the information environment of business firms and increases the amount of
publicly available information about these firms. With its reduced press coverage, this information source is likely to
be less important in Kuwait.

Relevance is one of the four principal qualitative characteristics that financial information should possess to
be useful for decision making (IASB, 2001, paragraph 24). Financial statement information is relevant when it
influences users’ economic decisions by helping them evaluate past, present or future events relating to an entity and
confirming or correcting their past evaluations (IASB, 2001, paragraph 26). A fundamental prerequisite for the value
relevance of accounting information is the quality of the accounting regulations prescribed. High-quality accounting
standards are also necessary to ensure that capital markets and the economy, as a whole, function well. Such
standards are important for investors, firms and those who set accounting standards (Hellstrom, 2006). Arthur Levitt,
former Chairman of the U.S. Securities and Exchange Commission (SEC), stated:

I firmly believe that the success of capital markets is directly dependent on the quality of the accounting and
disclosure system. Disclosure systems that are founded on high quality standards give investors confidence in the
credibility of financial reporting – and without investor confidence, markets cannot thrive. (Levitt, 1998, p. 80)

Kothari (2000) observes that market participants seek high-quality accounting information to mitigate
information asymmetry between firm managers and outside investors. Francis et al. (2004) identify seven desirable
attributes of accounting quality - accrual quality, persistence, value relevance, timeliness, predictability, smoothness
and conservatism. The authors find that value relevance, even if not the only attribute, is one of the most important
attributes of accounting quality. The findings of Francis et al. are supported by Barth et al. (2005) who claim that
higher quality accounting information results in less earnings management, more timely loss recognition, and more
value relevant earnings and equity book values.

Recognizing the critical role of high-quality accounting information in helping investors make economic
decisions, and in the expectation that adoption of international accounting standards would yield high-quality
accounting information, the Regulator of the Kuwait Stock Exchange (KSE)-issued Resolution No. 18 on April 17,
1990. This resolution required KSE-listed companies to comply with IFRS 2 in preparing annual and semi-annual
financial statements (Shuaib, 1999). These reporting requirements were strengthened further in 1998 with an
additional KSE requirement, which mandated that all listed companies report their quarterly financial statements at
the end of each quarter (KSE, 2001). The KSE approach is consistent with the view that an increased focus on the
informational needs of investors in accounting regulation should increase the value relevance of the information
contained in financial statements over time, as better informed investors are able to determine value more precisely
(Gjerde et al., 2005).

Motivated by both the lack of research on the value relevance of accounting information in emerging
markets and Kuwait’s unique institutional setting, the objective of this study is to examine the value relevance of

2
The IASB, known previously as the International Accounting Standards Committee (IASC), also issued the International
Accounting Standards (IAS) prior to 2001.
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IFRS-based accounting information—earnings and book value— produced by KSE-listed companies to KSE
participants during the 1995–2006 period. Due to the small number of firms listed on the KSE, the study's sample
for examining the value relevance consists of all companies listed on the KSE. To provide comprehensive insights
into the value relevance of earnings and book values to investors, two valuation models are used: the price model
and the returns model. The price model is used to examine links among stock prices, earnings and book values, as in
Ohlson (1995). The returns model is used to examine the links between stock returns and the levels and changes of
accounting earnings, as in Easton and Harris (1991).

The results of both the price and returns models show that earnings and book value were, jointly and
individually, positively and significantly related to stock price and stock returns during the 1995–2006 period. The
results suggest that investors in KSE-listed firms consistently perceived earnings and book value to be value-
relevant in every year and in all years combined. Interestingly, the value relevance of earnings of KSE-listed firms
were found to be higher, in terms of adjusted R² and earnings coefficients, than the findings observed in some
developed and emerging countries. This finding could imply that KSE investors rely on earnings and book value
information more than investors in other markets. The greater value relevance could be partially attributed to the
fairly limited sources of credible and useful competing information available to market participants and the lack of
alternative sources of information about prospects. This potentially makes accounting information more important
and powerful for participants in making investment decisions. An important implication of this finding is that the
KSE needs to develop its information environment further to become more efficient in offering a free exchange of
information about companies listed on its exchange.

The remainder of this paper is organized as follows. Section 2 provides a brief overview of the Kuwait
Stock Exchange. Section 3 provides an overview of prior research on the value relevance of accounting information.
Section 4 discusses the research design utilized to investigate the value relevance, while Section 5 presents an
analysis of the data and the results of the study. The paper concludes in Section 6 with a summary of findings and an
outline of the study’s major contributions and implications.

BACKGROUND ON THE KUWAIT STOCK EXCHANGE (KSE)

Formally opened in August 1983, the KSE is relatively young compared to other developed stock markets
(KSE, 2006). Since that time, the KSE has witnessed significant expansion that has brought it to the attention of
both domestic and international investors, particularly in recent years. The 2006 Kuwait Stock Exchange Investor
Guide shows that by the end of 2006, there were 163 KSE-listed companies. The KSE administration divides listed
companies into seven sectors - banking, insurance, investment, real estate, industry, services and food 3. Table 1
shows the KSE-listed companies are broadly distributed across these sectors in 2006, with investment and services
being the dominant sectors.

Table 1: KSE Investment Sector and Number of Listed Companies, 2006

Sector Number of Firms Percentage
Financial
(banks and Insurance) 16 9.8
Investment 43 26.4
Real estate 29 17.8
Industrial
(Industry and Food) 30 18.4
Services 45 27.6
Total 163 100
Source: Kuwait Stock Exchange, 2006

3
Due to the similarities among some of KSE sector operations and in order to avoid categories with a small number of firms, the
banking sector and the insurance sector are combined into a broader financial institutions category, and the food and industry
sectors are combined into a broader industrial category.
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Listing requirements for companies are established under Article 4 of KSE Regulations and are subject to
the approval of the Market Committee. The minimum capital required for a company to be listed on the KSE is 10
million Kuwait dinars (US$34 million). The company must be in operation for at least five years and must have
published audited financial statements for the three financial years prior to listing application. In addition, the
company must have achieved a net profit in the last two years, with a minimum yearly net profit of 7.5 percent of
the company’s capital (KSE, 2007).

PRIOR RESEARCH ON THE VALUE RELEVANCE OF ACCOUNTING INFORMATION

The seminal works of Ball and Brown (1968) and Beaver (1968) have been catalysts for a large number of
studies on the value relevance of accounting information. Their studies represent the first attempts to explore the
relationship between accounting variables and stock prices. The main objective of existing value relevance research
is to investigate whether reported accounting numbers provide valuable corporate information for investors and
other users (Negakis, 2005). Barth et al. (2001) argue that the key purpose of value relevance research is ‘to extend
our knowledge regarding the relevance and reliability of accounting amounts as reflected in equity values’ (Barth et
al.,2001, p.80). Barth et al. (2001) claims that value relevance research is not only important for investors, but it also
provides useful insight into accounting matters for standard setters and other users. Francis et al., (2004) identify
seven desirable attributes of accounting quality: accrual quality, persistence, value relevance, timeliness,
predictability, smoothness and conservatism. This suggests that value relevance, even if not the only attribute, is one
of the most important attributes of accounting quality.

Value Relevance Studies in Mature Financial Markets

Numerous studies are conducted in mature financial markets. For example, Collins et al. (1997) investigate
the value relevance of earnings, book value, and combined earnings and book value for U.S. firms over 1953–1993.
They report that earnings and book value are value relevant and that earnings and book value jointly explain 54% of
the cross-sectional variation in security prices for their study period. Collins et al. (1997)’s study shows that the
combined value relevance of earnings and book value seems to increase slightly over time, however, the value
relevance of earnings, individually, appears to decline, while the value relevance of book value increases over the
study period. Similar to Collins et al. (1997), Francis and Schipper (1999) examine the value relevance of earnings
and book value for U.S. firms from 1952 to 1994. Their results indicate that the explanatory power of earnings, and
changes in earnings, significantly decreased over time. Conversely, their test of the explanatory power of book
values showed no evidence of decline.

Using returns and price models, Lev and Zarowin (1999) examine the value relevance of financial
information (earnings, book values, and cash flows) compared to the total information available in the marketplace
between 1977 and 1996. Contrary to Collins et al. (1997) and Francis and Schipper (1999), Lev and Zarowin note a
systematic decline in the association between capital market values and key financial variables (book value,
earnings, and cash flow) for U.S. firms during the 1980s and 1990s. They argue that this decline in the usefulness of
financial information was due primarily to business change. Motivated by the anecdotal concerns of financial
analysts, accounting regulators and U.S. centric academic research papers that conclude that the relevance of
financial accounting information has declined over time, Brimble and Hodgson (2007) examine whether the
relevance of accounting earnings for valuation declined in Australia between 1973 and 2001. After controlling for
nonlinearities and stock price inefficiencies, the results show that the value relevance of accounting earnings did not
decline during this period.

The overall empirical results of the studies suggest that both balance sheet information (book values) and
income statements (earnings) are value relevant in mature financial markets, though, in the U.S. market, their
valuation importance has declined over time.

Value Relevance Studies in Emerging Financial Markets

While many studies are conducted in mature financial markets to explore the relationship between stock
prices (or returns) and accounting variables (earnings and book value), more recent research shows some interest in
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the value relevance of accounting information in an international context (Lopes, 2002). However, even with the
recent interest in international markets, emerging financial market research has been somewhat neglected.
Nevertheless, some interesting findings have arisen from a small number of studies.

Using a returns and price model, Chen et al. (2001) examine the relationship between accounting
information, earnings and book value, and stock price in the Chinese stock market from 1991 to 1998. Their findings
show that accounting information is value relevant according to both pooled cross-section and time series
regressions. These results are consistent across both returns and price models. Jermakowicz and Gornik-
Tomaszewski (1998) explore the association between stock returns and annual earnings, based on the Polish
accounting standards of firms listed on the Warsaw Stock Exchange (WSE). The study’s sample comprises 52 WSE-
listed firms from 1995 to 1997.

Using a returns model, the study’s results show that annual earnings are an important element of equity
valuation in the WSE. Using a returns and price model, Ragab and Omran (2006) investigate the value relevance of
earning and book value in the Egyptian market from 1998 to 2002. Empirical results show that, based on both
returns and price models, earnings and book value are all relevant in the Egyptian market and, except for a non-
significant relation between earnings changes and stock returns, the results are consistent with other literature on
value relevance in mature markets. Ragab and Omran rationalise the exception by stating that Egyptian investors
might have a very short-term horizon and thus focus on earnings levels rather than earnings changes when valuing
stocks. Ragab and Omran note that an important finding is that the value relevance of Egyptian financial accounting
information is relatively greater than information in more mature financial markets. They justify this finding by
arguing that competing information sources, such as earnings forecasts, management conference calls and financial
analyst reports are less prevalent in Egypt than more mature financial markets. Bae and Jeong (2007) examine the
value relevance of earnings and book value produced by companies that belong to Korean business groups known as
the chaebol, where controlling power is heavily concentrated in a single family. They argue that the current literature
on value relevance generally assumes that it is homogeneous across firms within a country, while their study show
that this assumption is invalid. Bae and Jeong (2007) argue that significant differences exist in the degrees of value
relevance among companies within a country, and that a company’s governance structure is a primary determinant
of value relevance.

In summary, value relevance studies that are undertaken in emerging financial markets use similar models
to those used in studies of the value relevance of financial statements in mature financial markets. While the findings
of research into value relevance in emerging markets are generally consistent with those of mature markets, some
inconsistencies are evident and warrant further investigation.

DATA AND RESEARCH METHODS

Time Period, Sample and Data Description

This study covers a 12-year period from 1995 to 2006. The data needed to investigate the value relevance
of earnings and book value includes stock prices, book values of equities, net income, dividends, total assets, total
liabilities and common shares outstanding. Consistent with the recommendations of Barth et al. (1992) and Kothari
and Zimmerman (1995), this study uses the per-share value of price and earnings to reduce heteroscedastic
disturbances and scaling effects. To ensure the accuracy of per-share information, all data were checked to confirm
the treatment of any capital adjustment. Table 2 shows the number of companies listed on the KSE between 1995
and 2006.

Due to the relatively small number of firms listed on the KSE during this period, this study uses all of the
KSE-listed firms. The price model sample consists of 1,057 firm-year observations for the entire period, ranging
from 45 in 1995 to 163 in 2006. The returns model sample consists of 928 firm-year observations for the entire
period, ranging from 45 in 1995 to 141 in 2006. Table 3 below classifies the sample observations included in the
study according to these sectors for both the price and returns models.

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Table 2: Number of KSE-Listed Companies 1995–2006
Year Number of firms Percentage
1995 45 4.3
1996 53 5.0
1997 65 6.1
1998 69 6.5
1999 76 7.2
2000 75 7.1
2001 76 7.2
2002 84 7.9
2003 96 9.1
2004 113 10.8
2005 142 13.4
2006 163 15.4
Total 1,057 100.0
Source: Kuwait Stock Exchange, 2006

Table 3: Price and Returns Model Sample Observations Based on Industry Type
Price Model Sample Returns Model Sample
Type Number of Observations Percentage Number of Observations Percentage
Financial
154 14.6 150 16.2
(banks and Insurance)
Investment 267 25.3 229 24.7
Real Estate 170 16.1 144 15.5
Industrial
254 24.0 234 25.2
(Industry and Food)
Service 212 20.0 171 18.4
Total 1,057 100 928 100

Empirical Valuation Models Assessing Value Relevance

Two valuation models used to examine accounting value relevance dominate the literature: the price model
and the returns model. The price model examines the association between stock price and earnings and book value,
as in Ohlson (1995). The returns model examines the association between stock returns and the levels and changes
of accounting earnings, as in Easton and Harris (1991). To provides comprehensive insights into value relevance of
accounting information both models are used in this study.

Price Model

Ohlson (1995) develops a model that links a firm’s market value to earnings and book value. In this model,
current earnings are considered a proxy for abnormal earnings, while book value is considered a proxy for the
present value of expected future normal earnings. Ohlson’s 1995 model expresses a firm’s market value as a linear
function of earnings, book values and other value relevant information. The model has many appealing properties
and provides a useful benchmark for conceptualising how market value relates to accounting data and other
information (Ohlson, 1995). Researchers have extensively used Ohlson’s theoretical model to empirically examine
the value relevance of accounting earnings and book value (Collins et al., 1997; Barth et al., 1998; Collins et al.,
1999; Francis and Schipper, 1999; Lev and Zarowin, 1999; Gjerde et al., 2005; Hellstrom, 2006; Bae and Jeong,
2007). The model is specified as follows:

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Pit =  0 +  1 EPSit +  2 BVSit + it (1)

Consistent with Collins et al. (1999), to investigate the relative explanatory power that earnings and book value
individually have for stock prices, the following two equations are used:

Pit = b0+ b1EPSit + it (2)

Pit = c0+ c1 BVSit+ it (3)

where

Pit = stock price per share for firm i at time t, three months after the fiscal year’s end of time t
EPSit = the earnings per share of firm i at time t
BVSit = the book value per share of firm i at time t
t = 1995,…, 2006, corresponding to the years 1995–2006

 it = other value relevant information

The statistical association between stock price and both earnings and book value is the primary metric used
to measure the value relevance of accounting numbers. If accounting variables (earnings and book value) are value
relevant to investors, then an association will exist between stock price and earnings and book value, and the
coefficients of earnings and book value will be statistically significant. The explanatory power (R²) of the regression
model measures this association.

Returns Model

To further test the value relevance of accounting information, the returns model is also used in this study.
As suggested by prior research and employed in Easton and Harris (1991), both earnings levels and earnings
changes, scaled by opening stock prices, are included in the returns model in this study. Easton and Harris (1991)
express the value relevance of accounting earnings as a function of earnings levels, earnings changes and other
unspecified factors. Thus, the basic returns model used in this study is:

Rit   0   1EPSit / Pit  1   2EPSit / Pit  1  it (4)

Consistent with Easton and Harris (1991), the following two equations are used to investigate the relative
explanatory power that earnings levels and earnings changes individually have for stock returns:

Rit = b0+ b1EPSit / Pit -1 + it (5)

Rit = c0+ c1 ∆EPSit / Pit -1 + it (6)

where:
the return over the 12 months that is computed as the price per share three months after
Rit = the fiscal year’s end plus net dividends per share minus the price per share nine months
before the fiscal year’s end divided by the price nine months before the fiscal year’s end 4
Pit-1 = the share price nine months before the fiscal year’s end
EPSit / Pit- = the earnings per share of firm i at time t deflated by the share price of firm i at time t-1

4
KSE-listed companies are required to release their financial statements within three months after the end of the fiscal year.
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the change in earnings per share from time t-1 to time t deflated by the share price of
∆EPSit / Pit-1 =
firm i at time t-1
t = 1995, . . . , 2006, corresponding to the years 1995–2006
 it = other value relevant information

Accounting earnings are considered value relevant if there is an association between the returns, the
earnings levels and changes, and whether the coefficients of the earnings levels and changes are statistically
significant.

Extended Price and Returns Models

Several studies have documented that several factors can influence the value relevance of earnings and
book value. These can include the earnings sign (positive or negative) (Collins et al., 1997; Barth et al., 1998;
Collins et al., 1999), industry categories (Barth et al., 1998; Francis and Schipper, 1999; Hellstrom, 2006), and firm
size (Collins et al., 1997; Barth et al., 1998). These factors are incorporated into the price and returns models as
control variables. The extended price and returns models that incorporate profitability, industry categories and firm
size as control variables are as follows:

Pit =  0 +  1 |EPSit| +  2 BVSit +  3 LOSSit +  4 IND_FINit +

 5 IND_INVESTit +  6 IND_INDUSit +  7 IND_SERVit +

 8 SIZEit + it (7)

Rit = a0+ a1|EPSit| / Pit -1 + a2 ∆|EPSit| / Pit -1 + a3 LOSSit + a4 IND_FINit +

a5 IND_INVESTit + a6 IND_INDUSit + a7 IND_SERVit + a8 SIZEit + it

(8)

where
Pit = stock price per share for firm i at time t, three months after the fiscal year’s end of time t
|EPSit| = the absolute value of earnings per share of firm i at time t
BVSit = the book value per share of firm i at time t
the returns over the 12 months, which is computed as the price per share three months after
Rit = the fiscal year’s end plus net dividends per share minus the price per share nine months
before the fiscal year’s end divided by the price nine months before the fiscal year’s end
Pit-1 = the share price nine months before the end of the fiscal year
the absolute value of the change in earnings per share from time t-1 to time t deflated by
|EPSit| / Pit -1 =
the share price of firm i at time t-1
the absolute value of the change in earnings per share from time t-1 to time t deflated by the
∆|EPSit| / Pit -1 =
share price of firm i at time t-1
LOSSit = dummy variable that equals 1 if the firm achieves negative earnings and 0 otherwise
IND_FIN = dummy variable that equals 1 for firms in the financial institutions category and 0 otherwise
IND_INVEST = dummy variable that equals 1 for firms in the investment category and 0 otherwise
IND_INDUS = dummy variable that equals 1 for firms in the industrial category and 0 otherwise
dummy variable that equals 1 for firms in the service category and 0 otherwise. The omitted
IND_SERV =
industry category when all categories are zero is the real estate category
the natural logarithm of total assets of firm i at time t, where t = 1995,…, 2006,
SIZE =
corresponding to the years 1995–2006
t = t = 1995,…, 2006, corresponding to the years 1995–2006
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RESULTS

Descriptive Statistics

Table 4 provides descriptive statistics based on the pooled cross-sectional, time-series sample for the
dependent and independent variables used in the valuation models, using the price and returns models. Table 4
shows the mean (median) stock price per share for the 12-year period to be about KD 0.50 (KD 0.35), ranging from
KD 0.27 in 1999 to KD 0.76 in 2004. The table indicates that the mean (median) earnings per share during the study
period was KD 0.04 (KD 0.03), ranging from KD –0.21 in 2006 to KD 0.98 in 2005. The mean (median) book value
per share over the 12-year period was KD 0.24 (KD 0.19), which increased across years.

For the returns model variables (stock returns, earnings levels and earnings changes), Table 4 shows that
the mean (median) stock returns of KSE-listed companies over the 12-year period was 19% (11%), ranging from –
0.73 in 1998 to 4.77 in 2004. However, the mean of stock returns tended to be higher than the median, which
indicates that the stock returns distribution was positively skewed. Both earnings level and earnings changes
exhibited similar differences between the mean and the median. For the price model variables (stock price per share,
book value per share and earnings per share), Table 4 shows that the distribution of the price model variables was
also positively skewed. Due to the variation from normality, the stock price and stock returns variables were
transformed using a natural log transformation. The transformation process dramatically reduced the skewness and
kurtosis in the raw data.

Table 4: Descriptive Statistics for Firm-Year Observations 1995–2006*

Variable N Mean Median Std. Dev. Min. Max.
Pit 1057 0.50 0.35 0.52 0.03 5.00
Rit 928 0.19 0.11 0.50 -0.73 4.77
BVSit 1057 0.24 0.19 0.18 0.02 1.62
EPSit 1057 0.04 0.03 0.06 -0.21 0.98
EPSit / Pit-1 928 0.09 0.08 0.11 -0.71 1.37
∆EPSit / Pit-1 928 0.009 0.008 0.15 -0.98 1.55
SIZEit 1057 301.32 61.50 764.95 2.65 7898.25
* All numbers are in Kuwaiti dinar (KD), the average exchange rate with the U.S. dollar is approximately 1KD : US$ 3.00.
Variables are defined as follows: N is the number of observations; Pit is the stock price per share for firm i at time t; EPSit is the
earnings per share of firm i at time t; BVSit is the book value per share of firm i at time t; Rit is the return over the 12 months,
computed as the price per share three months after the fiscal year’s end plus net dividends per share minus the price per share nine
months before the fiscal year’s end divided by the price nine months before the fiscal year’s end; Pit-1 is the share price nine months
before the fiscal year’s end; EPSit / Pit-1 is the earnings per share of firm i at time t deflated by the share price of firm i at time t-1;
∆EPSit / Pit-1 is the change in earnings per share from time t-1 to time t deflated by the share price of firm i at time t-1; SIZE is the
total assets of firm i at time t (KD million); and t = 1995, . . . , 2006, corresponding to the years 1995–2006.

Bivariate Correlation Results

Table 5 presents Pearson's correlation and Spearman’s rank correlation among the variables. As expected,
the variables expected to predict stock price are positively and significantly correlated to stock price and each other.
The variables that expected to predict stock returns are also positively and significantly correlated to stock returns.
Examining the correlation matrix of the independent variables of both price and returns models in Table 5 show no
pair-wise correlation coefficient in excess of 0.8. This suggests that multicollinearity is not likely to be a serious
problem (Gujarati, 2003). Variance inflation factors (VIF) were also examined and found to be well within
acceptable limits.

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Table 5: Bivariate Correlations among Dependent and Independent Variables for Firm-Year Observations 1995–2006
Variable Pit EPSit BVSit Rit EPSit / Pit-1 ∆EPSit / Pit-1 LSIZE
Pit 1.00 0.79** 0.75** 0.25** 0.34** 0.11** 0.26***
EPSit 0.71** 1.00 0.76** 0.25** 0.72** 0.37** 0.34***
BVSit 0.74** 0.72** 1.00 0.07* 0.41** 0.07* 0.40***
Rit 0.20** 0.12** -0.01 1.00 0.54** 0.50** 0.09***
EPSit / Pit-1 0.12** 0.46** 0.18** 0.43** 1.00 0.65** 0.27***
∆EPSit / Pit-1 0.05 0.32** 0.04 0.37** 0.75** 1.00 0.09***
LSIZE 0.28** 0.23*** 0.28*** 0.07** 0.14*** 0.03 1.00
Notes: *, ** Correlation is significant at ≤ 0.05 and 0.01 levels, respectively (two-tailed). N = 1057 for the price model variables
and 928 for the returns model variables. The upper-right diagonal presents Spearman's correlation and the lower-left diagonal
presents Pearson's correlation of variables. Variables are defined as follows: Pit is the stock price per share for firm i at time t;
EPSit is the earnings per share of firm i at time t; BVSit is the book value per share of firm i at time t; Rit = ((Pit + dit - Pit-1) / Pit-1)
is the return over 12 months; dit is the dividends per share of firm i at time t; EPSit / Pit-1 is the earnings per share of firm i at time t
deflated by the share price of firm i at time t-1; and ∆EPSit / Pit-1 is the change in earnings per share from time t-1 to time t
deflated by the share price of firm i at time t-1. LSIZE is the natural log of the inflation-adjusted total assets of firm i at time t;
and t = 1995, . . . , 2006, corresponding to the years 1995–2006.

Empirical Results of Value Relevance of Earnings and Book Value

Value Relevance of Earnings and Book Value—Price Model Results

Table 6 presents the pooled and yearly cross-sectional results of the regressing price on both earnings and
book value jointly (model 1) and individually (models 2 and 3). Table 6 shows the results of the pooled cross-
sectional, time-series regression of model (1), which indicate that the model was statistically significant (F = 680, p
< 0.01). The adjusted R² for the pooled cross-sectional, time-series regression of model (1) shows that earnings and
book value jointly explained 57% of the variations in KSE firms’ stock prices between 1995 and 2006 period.

In addition, the results of the pooled data presented in Table 6 indicate that the coefficient estimates of both
earnings and book value had a positive and significant (p < 0.01) impact on stock prices, indicating that earnings and
book value were significant factors for KSE firms’ stock valuation. Furthermore the year-by-year regression results
consistently support the pooled results. The adjusted R² of the yearly cross-sectional regressions of price on earnings
and book value ranged from 54% in 2005 to 83% in 1995, with a mean (median) of 65% (63%). The coefficient
estimates for earnings and book value were positive and significant in each year (p < 0.01). Similar results were
obtained when stock prices were regressed on earnings and book value, individually (models 2 and 3). As a
robustness check, Fama and MacBeth’s (1973) approach of averaging coefficients and calculating the t-statistics was
conducted. Table 6 shows that the average earnings and book value coefficients were positive and significant across
all models (p < 0.01).

The results for the price regression (model 1) tend to be higher than the findings obtained from some
developed markets (Collins et al., 1997; Francis and Schipper, 1999; Hellstrom, 2006). For example, in a study often
used as a benchmark in the value relevance of earnings and book value literature, Collins et al. (1997) use the price
model for a U.S. sample over 1953–1993 to report that earnings and book value explain 54% of the cross-sectional
variation in security prices for their study period. This current study obtained 57%. In addition, when comparing this
study's results with those of previous studies in emerging markets, the earnings and book values of KSE-listed firms
appear more value relevant. For instance, Bae and Jeong (2007) investigate the value relevance of the Korean firms’
earnings and book values during 1987–1998. Their results show that earnings and book value explained 34% of
Korean firms’ security prices during this time, which was 23% lower than for KSE-listed firms. Ragab and Omran
(2006) reveal that, in the Egyptian equity market, earnings and book value explained 40% of the variation in stock
prices during 1998–2002.

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Table 6: Pooled and Yearly Cross-Sectional Regressions of Price on Earnings and Book Value 1995–2006
Models:
Pit = a0+ a1EPSit + a2BVSit + it (1)
Pit = b0+ b1EPSit + it (2)
Pit = c0+ c1 BVSit+ it (3)

(2)
(1) (3)
Pit = a0+ a1EPSit + a2BVSit + it Pit = c0+ c1 BVSit+ it
Pit = b0+ b1EPSit +
 it
F
Year N a1 a2 R²T b1 R²EPS c1 R²BVS
Stat.
14.69 5.01 25.52 9.10
1995 44 0.834 102.67*** 0.744 0.735
(7.58)*** (5.62)*** (10.82)*** (12.20)***
7.53 2.45 13.03 4.18
1996 53 0.599 37.37*** 0.514 0.517
(1.83)* (1.70)* (5.12)*** (3.80)***
8.48 4.19 16.83 6.49
1997 63 0.694 67.91*** 0.573 0.627
(3.43)*** (4.37)*** (10.37)*** (8.57)***
9.92 4.96 17.80 7.35
1998 68 0.613 51.53*** 0.466 0.524
(2.94)*** (4.05)*** (7.02)*** (9.66)***
7.83 4.56 17.95 6.54
1999 75 0.672 73.59*** 0.539 0.627
(2.31)** (4.57)*** (5.99)*** (12.43)***
11.07 3.84 21.27 6.99
2000 71 0.716 85.67*** 0.667 0.672
(4.21)*** (4.63)*** (10.83)*** (13.25)***
10.97 3.13 21.57 5.56
2001 69 0.633 56.90*** 0.586 0.595
(2.24)** (2.50)** (9.82)*** (8.99)***
13.65 1.99 18.49 5.07
2002 78 0.686 81.78*** 0.649 0.526
(3.54)*** (2.27)** (6.65)*** (8.51)***
6.25 1.32 8.88 2.61
2003 96 0.636 81.18*** 0.564 0.471
(4.81)*** (4.26)*** (6.03)*** (5.65)***
8.82 1.05 11.55 3.07
2004 113 0.607 84.95*** 0.585 0.468
(5.38)*** (2.86)*** (10.12)*** (8.38)***
4.24 1.52 7.63 2.50
2005 137 0.537 77.77*** 0.451 0.469
(4.03)*** (4.41)*** (8.65)*** (7.02)***
6.40 1.26 9.86 2.34
2006 161 0.589 113.27*** 0.516 0.473
(5.18)*** (3.83)*** (9.91)*** (7.02)***
7.98 1.59 0.570 680.37*** 11.70 0.521 3.35 0.453
Pooled 1028
(10.00)*** (6.72)*** (18.12)*** (13.20)***
Fama-MacBeth
9.15 2.94 15.87 5.15
Averaging
(10.33)*** (6.70)*** (9.75)*** (8.04)***
Approach
*Significant at the 10% level; **significant at the 5% level; ***significant at the 1% level (two-tailed). Heteroscedasticity in the
yearly OLS was corrected by using White’s (1980) heteroscedastic-consistent standard errors; thus figures in parentheses are the
corresponding t-statistics. Heteroscedasticity and autocorrelation in the pooled OLS was corrected using Newey-West (1987)
heteroscedasticity and autocorrelation consistent standard errors; thus figures in parentheses are the corresponding t-statistics; Pit
is the stock price per share for firm i at time t; EPSit is the earnings per share of firm i at time t; BVSit is the book value per share
of firm i at time t, and t = 1995,..., 2006, corresponding to the years 1995–2006.

In summary, the findings for the price regression provide convincing evidence that the earnings and book
values that KSE-listed firms reported between 1995 and 2006 played an important role in equity valuation in the
KSE. Interestingly, the results for the price regression show that earnings and book value are more value relevant in
Kuwait than in some developed and emerging markets.

Extended Price Model

Table 7 shows the results of the extended price model incorporating the control variables. The regression
analysis of the extended price model presented in Table 7 shows that the estimated coefficients of both earnings and

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book value were positive and significant (p < 0.01). Consistent with the previous findings, the coefficient estimate of
the LOSS dummy was significant (p < 0.05) and negative, suggesting that the value relevance of earnings and book
value jointly was lower for loss firms than profit firms. Additionally, all the control variables related to industry
category and firm size had positive and statistically significant coefficient estimates. These results are consistent
with the notion of Barth et al. (1998), Francis and Schipper (1999), Gjerde et al. (2005) and others that the value
relevance of earnings and book value varies among industrial sectors due to differences in underlying real economic
activity that could affect the valuation characteristics of equity book values and net income. Firm size was also
found to be positive and significant (p < 0.05). These results support the conjecture of Collins et al. (1997) that book
value is more important than earnings in valuing smaller firms, but not larger firms. The study results can be
explained on the grounds that smaller KSE firms are often less mature and more susceptible to future growth.
Consequently, their earnings persistence is lower and may not be a good proxy for future earnings, which leads to
the increased importance of book value relative to earnings in equity valuation. Additionally, smaller KSE firms are
more likely to report losses and face financial distress. Therefore, investors might place greater weight on book
value as a proxy for abandonment or liquidation value when valuing smaller firms. Overall, the study findings are
consistent with previous studies exploring firm size as a factor in the value relevance of earnings and book value
(Collins et al., 1997; Collins et al., 1999; Chen et al., 2001; Gjerde et al., 2005).

Table 7: Regression Results of the Extended Price Model

Model:

Pit =  0 +  1 |EPSit| +  2 BVSit +  3 LOSSit +  4 IND_FINit +  5 IND_INVESTit +  6 IND_INDUSit +  7 IND_SERVit

+  8 LSIZEit + it (7)

Dependent Variable: Stock Price

Variable Coefficient T-Statistic
Intercept –1.935 –40.001***
|EPS| 7.803 14.579***
BVS 1.312 8.309***
LOSS –0.151 –2.261**
IND_FIN 0.379 6.614***
IND_INVEST 0.133 2.587***
IND_INDUS 0.326 5.977***
IND_SERV 0.426 7.553***
LSIZE 0.086 2.321**
N R² Adj. R² F-Statistic P-Value (F-Statistics)
1028 0.627 0.623 189.461 0.000
**Significant at the 5% level; ***significant at the 1% level (two-tailed). T-statistics are in parentheses. T-statistics are based on
Newey-West (1987) heteroscedasticity and autocorrelation consistent errors.

Pit is the stock price per share for firm i at time t, three months after the fiscal year’s end of time t; |EPSit| is the absolute value of
earnings per share of firm i at time t; BVSit is the book value per share of firm i at time t; LOSS is a dummy variable that equals
1 if firm has achieved negative earnings and 0 otherwise; IND_FIN is a dummy variable that equals 1 for firms in the financial
institutions category and 0 otherwise; IND_INVEST is a dummy variable that equals 1 for firms in the investment category and
0 otherwise; IND_INDUS is a dummy variable that equals 1 for firms in the industrial category and 0 otherwise; IND_SERV is
a dummy variable that equals 1 for firms in the service category and 0 otherwise (the omitted industry category when all
categories are 0 is the real estate category); LSIZE is the natural log of the total assets of firm i at time t; and t = 1995, . . . ,
2006, corresponding to the years 1995–2006.

Value Relevance of Earnings—Returns Model Results

Table 8 reports the results of the pooled and yearly cross-sectional regressions of annual security returns on
the deflated earnings level and earnings changes, using the returns model approach (models 4-6). For the pooled data
(all years) presented in Table 8, the results of the multivariate regression model (4), which incorporated the earnings
levels and earnings changes, show that the model was highly significant (F = 161.51, p < 0.01). The results indicate
that earnings levels and earnings changes jointly explained 27% of the variation in annual returns over the study
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period. The estimated coefficients of the earnings levels and earnings changes were positive and significant (p <
0.01) for the pooled data. Similar results were obtained for the pooled univariate regression models (5 and 5). The
robustness of these findings was confirmed in the averaging approach results of Fama and MacBeth (1973). The
year-by-year results in Table 8 for model (4) support the conclusion based on the pooled data, which suggests that
KSE investors perceived earnings levels to be value-relevant information. The yearly regression results show that, in
most years, the estimated coefficients of the earnings levels (EPS) were positive and significant (p < 0.01). In
contrast, the year-by-year regression results reveal that the estimated coefficients of earnings changes (∆EPS) were
significant (at the 5% and 10% levels) only in 4 of the 12 years.

Table 8: Pooled and Yearly Cross-Sectional Regressions of Annual Security Returns on Earnings Levels and Earnings
Changes 1995–2006
Models:
Rit = a0+ a1EPSit / Pit -1 + a2 ∆EPSit / Pit -1 + it (4)
Rit = b0+ b1EPSit / Pit -1 + it (5)
Rit = c0+ c1 ∆EPSit / Pit -1 + it (6)
Model (6) Model (7)
Model (5)
Rit = c0+ c1 ∆EPSit / Pit -1
Rit = a0+ a1EPSit / Pit -1 + a2 ∆EPSit / Pit -1 + it
Rit = b0+ b1EPSit / Pit -1 +
it + it
Year N a1 a2 R²T F. Stat. b1 R²E c1 R²∆E
3.50 0.46 3.26 1.34
1995 44 0.404 13.87*** 0.398 0.069
(5.31)*** (0.46) (5.61)*** (1.03)
0.73 1.03 1.57 1.73
1996 45 0.142 3.49** 0.132 0.136
(0.57) (0.81) (2.77)*** (2.74)***
3.09 –0.44 2.53 0.54
1997 51 0.248 7.93*** 0.232 0.042
(2.45)** (–0.59) (3.37)*** (0.64)
2.81 0.23 2.95 0.64
1998 62 0.242 9.40*** 0.236 0.046
(3.35)*** (0.68) (3.62)*** (1.07)
3.10 –0.24 3.01 0.25
1999 66 0.522 34.48*** 0.516 0.008
(7.31)*** (–1.46) (7.12)*** (0.58)
2.07 0.03 2.09 0.45
2000 72 0.386 21.75*** 0.386 0.064
(5.90)*** (0.42) (6.41)*** (1.18)
0.53 0.39 0.77 0.50
2001 74 0.124 5.02*** 0.075 0.094
(1.21) (2.03)** (1.76)* (1.90)*
2.00 0.33 2.29 1.22
2002 71 0.512 35.63*** 0.500 0.281
(6.83)*** (2.29)** (8.86)*** (4.43)***
1.51 0.32 1.76 1.16
2003 77 0.261 13.04*** 0.254 0.157
(3.90)*** (1.17) (5.41)*** (3.42)***
3.11 1.03 3.72 2.19
2004 94 0.312 20.68*** 0.286 0.158
(4.93)*** (1.73)* (6.15)*** (3.13)***
2.00 –0.06 1.95 1.86
2005 107 0.257 18.02*** 0.257 0.181
(3.59)*** (–0.10) (7.49)*** (5.97)***
1.46 0.39 1.85 0.88
2006 138 0.226 19.67*** 0.208 0.142
(3.98)*** (1.74)* (5.87)*** (2.64)***
Pooled 901 2.06 0.43 0.265 161.51*** 2.41 0.253 1.21 0.140
(11.52)*** (4.06)*** (15.72)*** (7.17)***
Fama-MacBeth
2.16 0.29 2.31 1.06
Averaging
(7.64)*** (2.26)*** (9.76)*** (5.83)***
Approach
* Significant at the 10 per cent level; **significant at the 5% level; ***significant at the 1% level (two-tailed). Heteroscedasticity
in the yearly OLS was corrected using White’s (1980) heteroscedastic-consistent standard errors, thus figures in parentheses are
the corresponding t-statistics. Heteroscedasticity and autocorrelation in the pooled OLS was corrected using Newey-West (1987)
heteroscedasticity and autocorrelation consistent standard errors, thus figures in parentheses are the corresponding t-statistics; Rit
is the return over the 12 months, which is computed as the price per share three months after the fiscal year’s end plus net
dividends per share minus the price per share nine months before the fiscal year’s end divided by the price nine months before
the fiscal year’s end; Pit-1 is the share price nine months before the fiscal year’s end; EPSit / Pit-1 is the earnings per share of firm i
at time t deflated by the share price of firm i at time t-1; ∆EPSit / Pit-1 is the change in earnings per share from time t-1 to time t
deflated by the share price of firm i at time t-1; and t = 1995, . . . , 2006, corresponding to the years 1995–2006.

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Similar to the price model, the findings based on the returns model shows that investors considered KSE-
listed firms’ earnings to be value relevant during the 1995–2006 period. Interestingly, the findings for the returns
regression (model 4) are higher than those observed in some developed and emerging markets (Easton and Harris,
1991; Jermakowicz and Gornik-Tomaszewski, 1998; Francis and Schipper, 1999; Chen et al., 2001; Gjerde et al.,
2005; Hellstrom, 2006; Ragab and Omran, 2006). For example, using the returns model for a U.S. sample over the
1968–1986 period, Easton and Harris (1991) report that earnings levels and changes explained 8% of the cross-
sectional variation in stock returns compared with the 27% obtained in this current study. In other studies, Francis
and Schipper (1999) report that for their study of U.S. firms over 1952–1994, the adjusted R² of the yearly returns
model ranged from 5 to 46%, with the earnings variables explaining 22% of the variation in stock returns. Gjerde et
al. (2005) show that earnings levels and changes explained 5% of the variation in stock returns in Norway during
1965–2004. In the Egyptian equity market, Ragab and Omran (2006) report that earnings levels and changes
explained 4% of stock returns variations during the 1998–2002 period.

In summary, the returns model provides evidence that annual earnings reported by KSE-listed firms were
significantly associated with stock returns during the 1995–2006 period, which is consistent with the value relevance
of earnings literature. However, the present study's results tend to be higher in terms of adjusted R² and earnings
coefficients than those reported in other developed and emerging markets. This result might suggest that KSE
investors rely more heavily on earnings than investors in other markets. Similar to other emerging markets, the KSE
has a large portion of unsophisticated, naïve investors. The financial markets literature has documented that the
likelihood of unsophisticated investors functionally fixating on earnings information is greater than for sophisticated
investors (Hand, 1990). Thus, the high association between stock returns and earnings could be partially due to the
large proportion of naïve investors in the KSE. Consequently, the value relevance of earnings is higher in the KSE
than other well-developed markets. In addition, it could be argued that earnings are more value relevant to KSE
investors because of the lack of alternative information sources in Kuwait about prospects.

Extended Returns Model

Table 9: Regression Results of the Extended Returns Model

Model:
Rit = a0+ a1|EPSit| / Pit -1 + a2 ∆|EPSit| / Pit -1 + a3 LOSSit + a4 IND_FINit +
a5 IND_INVESTit + a6 IND_INDUSit + a7 IND_SERVit + a8 LSIZEit + it (8)
Dependent Variable: Annual Return
Variable Coefficient T-Statistic
Intercept –0.176 –2.849***
|EPSit| / Pit -1 1.906 9.936***
∆|EPSit| / Pit -1 0.411 4.104***
LOSS –0.119 –1.934*
IND_FIN 0.057 1.555
IND_INVEST –0.006 –0.145
IND_INDUS 0.008 0.209
IND_SERV –0.008 –0.194
LSIZE –0.025 –1.016
N R² Adj.R² F-Statistic P-Value (F-Statistics)
901 0.273 0.267 41.973 0.000
*Significant at the 10% level; ***significant at the 1% level (two-tailed). T-statistics are in parentheses. T-statistics are based on
Newey-West (1987) heteroscedasticity and autocorrelation consistent errors. Rit is the return over the 12 months, which is
computed as the price per share three months after the fiscal year’s end, plus net dividends per share minus the price per share nine
months before the fiscal year’s end divided by the price nine months before the fiscal year’s end; Pit-1 is the share price nine
months before the fiscal year’s end; |EPSit| / Pit -1 is the absolute value of the earnings per share of firm i at time t deflated by the
share price of firm i at time t-1; ∆|EPSit| / Pit -1 is the absolute value of the change in earnings per share from time t-1 to time t
deflated by the share price of firm i at time t-1; LOSSit is a dummy variable that equals 1 if the firm achieved negative earnings
and 0 otherwise; IND_FIN is a dummy variable that equals 1 for firms in the finance category and 0 otherwise; IND_INVEST is
a dummy variable that equals 1 for firms in the investment category and 0 otherwise; IND_INDUS is a dummy variable that
equals 1 for firms in the industrial category and 0 otherwise; IND_SERV is a dummy variable that equals 1 for firms in the service
category and 0 otherwise (the omitted industry category when all categories are 0 is the real estate category); LSIZE is the natural
log of the inflation-adjusted total assets of firm i at time t; and t = 1995, . . . , 2006, corresponding to the years 1995–2006.

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Table 9 shows the results of the extended returns model. The model had significant explanatory power for
stock returns (adjusted R2 = 26.7%, F = 41.97, p < 0.1), and the results are similar to those obtained from the basic
returns model (model 4) with positive and significant (p < 0.01) earnings levels and earnings changes coefficients.
For the control variables, the results show that the estimated coefficient of LOSS was negative and significant (p <
0.01). In contrast to profitability, the estimated coefficients of all industry categories and size variables were not
statistically significant at any conventional level. The insignificant influence observed for industry categories and
size variable could have been due to an omitted variable, such as the omission of book values in the returns model.
Consistent with the price model findings, the returns model results provide evidence that investors considered the
earnings levels reported by KSE firms to be a significant element in the valuation of these firms. The results show
that earnings changes were also important for investors in the valuation process, but not as much as earnings levels.

CONCLUSION

The review of studies on the value relevance of accounting information revealed a significant number of
studies that investigate the role of fundamental variables in explaining the relationship between stock price (or stock
returns) and the book value of equity and earnings. Until recently, many of these studies have been conducted in the
U.S. and other countries with highly developed markets, while little attention has been given to international
markets. However, the literature on accounting information has recently started to show interest in studies with a
more international context. The motivations for this interest vary, but generally relate to the unique accounting,
reporting, standard setting and other institutional factors of these countries. These differences have prompted a
desire to improve general understanding about the influence of institutional factors on the value relevance of
accounting information. Motivated by both the lack of research on the value relevance of accounting information in
emerging markets and Kuwait’s unique institutional setting, the objective of this study is to examine the value
relevance of IFRS-based accounting information—earnings and book value— produced by KSE-listed companies to
KSE participants during the 1995–2006 period.

Two types of valuation models were used to examine accounting information value relevance to investors:
the price model and the returns model. Control variables were incorporated into the price and returns models to
capture the influence of profitability, industry category and firm size on the value relevance of accounting earnings
and book value. The results of both models show that earnings and book value were, jointly and individually,
positively and significantly related to stock price and stock returns during the 1995–2006 period. These results
suggest that investors in KSE-listed firms consistently perceived earnings and book value to be value relevant in
every year and in all years combined. Interestingly, the value relevance of earnings and book value of KSE-listed
firms were found to be higher, in terms of adjusted R² and earnings coefficients, than the findings observed in some
developed and emerging countries. This finding could imply that KSE investors rely on earnings and book value
information more than investors in other markets. One reason that accounting information has greater value
relevance for the KSE than for other markets could be the fairly limited sources of credible and useful competing
information available to market participants. This potentially makes accounting information more important and
powerful for participants in making investment decisions. An important implication of this finding is that the KSE
needs to develop its information environment further to become more efficient in offering a free exchange of
information about companies listed on its exchange.

Although this study attempted to cover all KSE-listed companies, the conclusions drawn are subject to an
unavoidably small sample size as the KSE is a relatively small market. In addition, due to data availability, the study
period was limited to 12 years in investigating the value relevance of accounting information. One possible area for
future research would be to investigate the change in the value relevance over time. In addition, it would be
interesting to compare the value relevance of KSE-listed firms with the value relevance of firms listed on other Gulf
Cooperation Council (GCC) exchanges, since these have similar institutional and legal settings.

AUTHOR INFORMATION

Mishari M. Alfaraih, Ph.D., CPA, CIA is an Assistant Professor of Accounting at the College of Business Studies,
The Public Authority for Applied Education and Training, Kuwait. He holds a Ph.D. in Accounting from
Queensland University of Technology, Australia. He is a certified public accountant and a certified internal auditor.
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His research interests include financial information flows and information quality in capital markets. - E.mail
address: [email protected] - Tel: +965-99755666

Faisal S. Alanezi, Ph.D., is an Assistant Professor of Accounting at the College of Business Studies, The Public
Authority for Applied Education and Training, Kuwait. He holds a Ph.D. in Accounting from University of
Newcastle, Australia. His research interests include financial reporting and disclosure. - E.mail address:
[email protected] - Tel: +965-99133230

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