Abstract
The paper examines the influence of economic factors namely foreign ownership and trading volume on the valuerelevance of earnings, book value and cash flows relative to three share price proxies namely average annual shareprice, annual closing share price and share price after a three-month period following the financial year-end(hereafter ATM-share price), after controlling company’s size and leverage for Jordanian services and industrialcompanies within the period 2004-2009. Since the paper is the first, as the researcher believes, that examines theinfluence of foreign ownership and trading volume on the value relevance of earnings, book value and cash flowsin an emerging exchange, it aims to provide evidence regarding the influence of these factors on the valuerelevance of accounting information. The paper found that the value relevance of earnings and book value isgreater for companies having foreign ownership and larger trading volume. With the effect of these factors,closing share price shows more response than the other share price proxies. The findings suggest that marketparticipants might be able to extract the firm value via these economic factors. The paper extends the valuationmodel by including cash flows together with earnings and book value. The findings demonstrate that there is ashift away from earnings towards book value as the basis of firm valuation.
Highlights
Many economic factors can affect the value relevance of accounting information (Anandarajan & Hasan, 2010; Shamki, 2012)
The significance of this study is to examine the influence of trading volume and foreign ownership on the value relevance of earnings, book value, and cash flows simultaneously that has not been examined in Jordan as far as www.ccsenet.org/ijbm
Due to the dramatic changes in trading volumes in ASE within the observed period and since no study examined the influence of trading volume on the value relevance of cash flows especially in Jordan, this paper extends studies of Chen et al (2001), Dontoh et al (2004), and Liu and Liu (2007) by adding cash flows from operation as a new variable with earnings and book value to examine the influence of trading volume on the value relevance of these accounting variables in Jordan
Summary
Many economic factors can affect the value relevance of accounting information (Anandarajan & Hasan, 2010; Shamki, 2012). This paper examines the influence of the economic factors (traced by foreign ownership and trading volume) on the value relevance of accounting information (earnings, book value of equity and cash flows from operation) after controlling company’s size and leverage. Dontoh, Radhakrishnan, and Ronen (2004) and Liu and Liu (2007) examine the influence of trading volume on the value relevance of earnings and book value The paper extends these studies by examining the influence of foreign ownership and trading volume on the value relevance of earnings, book value, and cash flows simultaneously that has not been researched before especially in Jordan. The significance of this study is to examine the influence of trading volume and foreign ownership on the value relevance of earnings, book value, and cash flows simultaneously that has not been examined in Jordan as far as www.ccsenet.org/ijbm. Findings of the paper are revealed in the fourth section while the discussion and summary are presented in the last section
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