Abstract:
This study investigates the value relevance of accounting data in the Sri Lankan stock
market, in order to determine whether the accounting information has the ability to
capture data that affect the share prices of the companies listed on the CSE from 2010
to 2015. The main objective of this study is explore the relationship between equity
price with earnings, dividends and book value per share. This study used secondary
data to investigate the value relevance of accounting numbers. Secondary data were
obtained from the Annual Financial reports of companies listed on the CSE. Eighty
one (81) companies have been selected to the sample representing nineteen sectors in
the Sri Lankan share market. Cross-section pooled, fixed year and fixed sector
regressions are performed to analyze the data. More ever, this study is motivated by
reformulating the ohlson (1995) model for explaining the equity price with the
incremental relevance of accounting variables.
The findings show that there is a significant relationship between accounting
information and share prices of companies listed on the CSE. Earnings are the most
widely used accounting information for investment decisions in Sri Lanka, followed
by dividends and book value.
Therefore, the study suggests that companies should improve the quality of earnings
as manipulated earnings (of which Dividends are sub-sets) have a significant effects
on share prices. Moreover, there should be firm and stiff penalty by the national
standards setters for manipulating earnings in the Sri Lankan stock market. It is also
recommended that all companies listed on Sri Lankan Stock Exchange should prepare
Simplified Investor's Summary Reports (SISR) with emphases on the most widely
used accounting information along the required mandatory detailed financial
statements to suit Sri Lankan peculiarities. It is expected that the removal of
information over-load particularly for non-accountants and financial analysts. It is
expected the above measures to increase investors' confidence in the accounting
numbers and thus on economic growth in Sri Lanka.
