The Effect Of Other Information On Equity Valuation: Kuwait Evidence

Abstract

Previous studies on the value relevance of accounting information adopt Ohlsons linear information dynamics which, if other information is ignored, leads to a theoretical valuation model solely involving earnings, book value, and net shareholder cash flows or (net dividends). The lack of analysis of other value-relevant data may defeat the effectiveness of the Ohlsons model since the current accounting data cannot fully account for future earnings. The potential implication of ignoring other information is that it could introduce bias into estimated coefficients (e.g. Ohlson, 1995; Hand and Landsman, 2005). This study examines the effect of introducing other information proxied by lagged valuation error on equity valuation, utilizing a sample of non-financial companies listed at the Kuwait Stock Exchange (KSE) over the period 2003 to 2009. Empirical results of this study reveal that our proxy for other information appears to capture valuation implications of information other than current variables in the linear information dynamic setting. Results also reveal that adding other information to the valuation model clearly reduces the coefficients on earnings and dividends, and increases the coefficient of book value; however, book value and earnings remain significantly associated with stock prices. As a consequence, current accounting variables appear to be capturing some, but not all, of other information when this variable is omitted. We conclude that other information is an important factor in determining the market value of firms and hence should not be omitted in studies examining the value relevance of accounting information.