The change in the value-relevance of earnings and book values in equity valuation over the past 20 years and the impact of the adoption of IASs: the case of Kuwait

This study investigates the change in the value-relevance of earnings and book values in equity valuation over the last 20 years in Kuwait. Following Collins et al. (1997) and Lev and Zarowin (1999), the study uses statistical association between stock prices and accounting data (earnings and book values) and a decomposition technique used in previous studies to assess: whether there is a systematic change in the value-relevance to investors of accounting data over the past 20 years; whether there is a systematic change in the relative importance of earnings and book values in explaining the changes in stock prices over time; whether the value-relevance of earnings and book values and the relative importance of them have changed since the adoption of the International Accounting Standards (IASs) in 1990 by all Kuwaiti corporations. The study reports four primary findings. First, earnings and book values, jointly and individually, have significant explanatory power for securities prices over the last 20 years. Second, the combined value-relevance of earnings and book values has increased over time. Third, the incremental value-relevance of earnings has increased over time while that of book values has declined. Fourth, the combined value-relevance of earnings and book values has improved and the incremental explanatory power of earnings (book values) has increased (decreased) since the adoption of IASs in 1990.