Academic journal article The International Journal of Business and Finance Research

The Value Relevance of Mandatory Corporate Disclosures: Evidence from Kuwait

Academic journal article The International Journal of Business and Finance Research

The Value Relevance of Mandatory Corporate Disclosures: Evidence from Kuwait

Article excerpt

ABSTRACT

This study is the first to explore the association between the level of compliance with International Financial Reporting Standards (IFRS) mandatory disclosures and the value relevance of accounting information to market participants. This association is examined in the context of listed companies in the emerging economy of Kuwait - a jurisdiction with a history of applying international accounting standards but with lax enforcement. The research design of the study consists of two parts. First, the level of compliance with mandatory IFRS disclosures of Kuwait Stock Exchange (KSE) listed firms in 2010 is examined using a disclosure index. Second, the value relevance of financial statement information, specifically, earnings and book values, is examined empirically using Ohlson's (1995) valuation model that captures the level of compliance with IFRS among KSE listed firms. The results show a significant association between the level of compliance with IFRS and the value relevance of earnings and book values to KSE investors, highlighting the importance of establishing and maintaining adequate monitoring and enforcement mechanisms to ensure compliance with accounting standards. The outcomes of this study serve to inform regulators and companies on whether moving toward stricter compliance with IFRS will necessarily improve the value relevance of financial statement information.

JEL: M44, M48

KEYWORDS: Value Relevance, International Financial Reporting Standards, Compliance, Disclosure Index, Kuwait

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The growing acceptance and use of International Financial Reporting Standards (IFRS) and its predecessor, International Accounting Standards (IAS), in major capital markets throughout the world over the past several years is remarkable. Currently, there are nearly 130 countries that have adopted or that make a commitment to adopt IFRS (IASB, 2014). The International Accounting Standards Board (IASB) claims that its principle objective is to develop a single set of high-quality financial reporting standards (IASB, 2014). However, as IFRS adoption expands globally, concerns and questions remain about the usefulness of these standards in producing high-quality information. In addressing these concerns and as part of its continuous efforts to improve the quality of existing IFRS, the IASB hosted in January 2013 a public forum to foster dialogue about how to improve the quality and usefulness of its standards (IFRS, 2013). It can be argued that usefulness is likely impacted by differences in IFRS adoption, interpretation, and compliance across jurisdictions. In jurisdictions with lax enforcement regimes, compliance is likely to be the major impediment to the usefulness and the value relevance for the IFRS-based accounting information to investors. However, a review of value relevance literature shows that a prominent characteristic in most of the previous studies on value relevance of accounting information is a failure to distinguish between accounting standards that are used and those that are actually implemented. Interestingly, despite the obvious link between compliance and value relevance, most value relevance research ignores compliance in assessing the value relevance of accounting information (Hellstrom, 2006).

While extant research generally supports the value relevance of IFRS adoption (e.g., Larsson and Bogstrand, 2012; Kargin, 2013), no known research has examined how the extent of compliance with IFRS affects financial statements' value relevance to users. A possible explanation for ignoring the compliance issue in value relevance research could be that most value relevance research has been mainly conducted in developed countries where there are high levels of compliance with accounting standards and strong enforcement regimes. However, prior research on developing countries has documented lax enforcement and limited compliance with IFRS, which undermines the effectiveness of IFRS in producing high-quality information. …

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