Value relevance of accounting earnings and cash flows in a transition economy: the case of Serbia

Purpose - The purpose of the study is to investigate the association of earnings and cash flows with stock prices and returns, and the impact of regulatory changes on the value relevance of accounting numbers. Design/methodology/approach - The authors examine a sample of non-financial firms listed on the Belgrade Stock Exchange from 2005 to 2018 and use three regression models – price, return and differenced. Findings - The authors find evidence that accounting earnings are more value relevant than cash flows. The authors also find negative relation of earnings changes with stock returns and argue that this is due to the lower persistence of negative earnings levels and changes. Finally, the authors find that the value relevance of accounting information in Serbia increases after the improvements in capital market regulation. Research limitations/implications - Given the empirical focus on a transition economy, the widespread applicability of the study is limited. The findings, however, call for more research on transition economies to better understand the functioning of capital markets and the way information from financial statements is incorporated into stock prices. Practical implications - The results imply that policymakers in transition economies should improve the accounting and capital market regulation to provide better investor protection and to improve the capital market conditions. Originality/value - The authors add to knowledge about the value relevance of accounting information in emerging and transition economies. The results could be of interest to standard setters in their efforts to better understand and improve the quality of accounting information in emerging and transition economies.