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The value relevance of earnings in a transition economy: The case of Romania

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  • Filip, Andrei
  • Raffournier, Bernard
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    Abstract

    We investigate the value relevance of earnings on the Bucharest Stock Exchange. We find that the association between accounting earnings and stock returns is comparable to the levels reported by studies conducted on more mature markets, and that it is higher for securities issued by small companies. Excluding losses from the analysis increases the value relevance of earnings, which confirms the transitory nature of negative earnings, already documented by prior studies. We also find that the regression coefficient of earnings changes is negative and we provide evidence consistent with the hypothesis that it is a consequence of the relative inefficiency of the market. Finally, the "prices lead earnings" hypothesis formulated for more mature markets is not supported by our results.

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    Bibliographic Info

    Article provided by Elsevier in its journal The International Journal of Accounting.

    Volume (Year): 45 (2010)
    Issue (Month): 1 (March)
    Pages: 77-103

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    Handle: RePEc:eee:accoun:v:45:y:2010:i:1:p:77-103

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    Web page: http://www.elsevier.com/locate/inca/620179

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    Keywords: Value relevance Transition economy Eastern and Central Europe Romania Hyperinflation;

    References

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    1. David Aboody, 2002. "Measuring Value Relevance in a (Possibly) Inefficient Market," Journal of Accounting Research, Wiley Blackwell, Wiley Blackwell, vol. 40(4), pages 965-986, 09.
    2. N. King & A. Beattie & A. -M. Cristescu & P. Weetman, 2001. "Developing accounting and audit in a transition economy: the Romanian experience," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(1), pages 149-171.
    3. Abdel-khalik, A. Rashad & Wong, Kie Ann & Wu, Annie, 1999. "The Information Environment of China's A and B Shares: Can We Make Sense of the Numbers?," The International Journal of Accounting, Elsevier, Elsevier, vol. 34(4), pages 467-489, 010.
    4. Pascal Dumontier & Bernard Raffournier, 2002. "Accounting and capital markets: a survey of the European evidence," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(1), pages 119-151.
    5. Barry Harrison & David Paton, 2005. "Transition, the Evolution of Stock Market Efficiency and Entry into EU: The Case of Romania," Economic Change and Restructuring, Springer, Springer, vol. 37(3), pages 203-223, 09.
    6. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 29(1), pages 1-51, February.
    7. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 39-67, December.
    8. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 105-231, September.
    9. Irena Jindrichovska, 2001. "The relationship between accounting numbers and returns: some empirical evidence from the emerging market of the Czech Republic," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(1), pages 107-131.
    10. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 2001. "The relevance of the value relevance literature for financial accounting standard setting: another view," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 77-104, September.
    11. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 2(1), pages 3-28, March.
    12. Dimitrios Kousenidis & Christos Negakis & Iordanis Floropoulos, 2000. "Size and book-to-market factors in the relationship between average stock returns and average book returns: some evidence from an emerging market," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 225-243.
    13. Brown, Stephen & Lo, Kin & Lys, Thomas, 1999. "Use of R2 in accounting research: measuring changes in value relevance over the last four decades," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 28(2), pages 83-115, December.
    14. Neringa Jarmalaite Pritchard, 2002. "The Relationship between Accounting Numbers and Returns in the Baltic Stock Markets," CERT Discussion Papers, Centre for Economic Reform and Transformation, Heriot Watt University 0206, Centre for Economic Reform and Transformation, Heriot Watt University.
    15. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 3-37, December.
    16. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 3-75, September.
    17. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 20(2), pages 155-192, September.
    18. Beaver, William H. & Griffin, Paul A. & Landsman, Wayne R., 1982. "The incremental information content of replacement cost earnings," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 4(1), pages 15-39, July.
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    Cited by:
    1. Jamal Barzegari Khanagha, 2011. "Value Relevance of Accounting Information in the United Arab Emirates," International Journal of Economics and Financial Issues, Econjournals, vol. 1(2), pages 33-45, June.
    2. Dobija, Dorota & Klimczak, Karol Marek, 2010. "Development of accounting in Poland: Market efficiency and the value relevance of reported earnings," The International Journal of Accounting, Elsevier, Elsevier, vol. 45(3), pages 356-374, September.

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