THE VALUE RELEVANCE OF FINANCIAL STATEMENTS?INFORMATION: WITH SPECIAL REFERENCE TO THE LISTED COMPANIES IN COLOMBO STOCK EXCHANGE

Abstract

Investors and other interest parties of accounting make use of financial statements and disclosures, among other publically available information, to assess the risk and value of firm when taking the investment decisions. According to Sushma Vishnani, Bhupesh Kr. Shah (2008) ?Value relevance? implies ability of the financial information contained in the financial statements to explain the stock market measures. The purpose of this paper is to investigate the value relevance of financial information that extracted from financial statement directly or indirectly. Especially the study considered the value relevance of earnings and cash flows in stock prices. In addition, the study pays attention on the firm size effect on value relevance. A hundred (100) companies have been selected to the sample representing the all the business sectors except banking, finance and insurance over a period of 5 years from 2004 to 2008 listed in the Colombo Stock Exchange (CSE) and the pooled time regression method is used to analyze the data. Return model as well as Price model was used to determine the value relevance of financial statements? information. It revealed that the value relevance of accounting information under the Price model has more explanatory power than Return Model. The empirical results of the study indicate that Earning Per Share (EPS) is the most value relevant variable in this study and it is significant at 0.01 level. Regression of earnings, book value and cash flows on stock price results indicate that the cash flows from investment is another value relevance variables at 0.01 significant level. When running stepwise regression to determine the best model of value relevance, EPS is the only value relevant variable for determining stock prices.