The information content of accounting earnings, book values, losses and firm size vis-�-vis stocks: empirical evidence from an emerging stock market

The Karachi Stock Exchange (KSE) has consistently outperformed better known emerging markets like Brazil, India and China over the past decade. However, some economists, notably Khwja and Mian (2005), claim that trade-based manipulation as opposed to firm fundamentals is the real cause behind this remarkable growth. To uncover the relationship between stock prices and firm fundamentals, we measure the degree of association between firm-specific accounting information embedded in annual financial statements and stock prices, commonly known as the value relevance of financial statements. Based on a data-set of 100 firms listed on the KSE from 1999 to 2011, we find that accounting information is an important determinant of stock returns. In addition, consistent with prior research, we also find that the explanatory power of accounting information shifts from earnings to book values in case of negative earnings and firm size is inversely related to stock returns. However, time-series regressions reveal a gradual decline in the value relevance of accounting information. Our findings are robust to different econometric specifications and methods.