The Usefulness Of Earnings And Book Value For Equity Valuation To Kuwait Stock Exchange Participants

Abstract

Motivated by the lack of research on the value relevance of accounting information in emerging markets and the unique institutional setting in Kuwait, the objective of this study is to examine the value relevance of accounting earnings and book value information produced by Kuwait Stock Exchange (KSE)-listed firms during the 1995-2006 period empirically by using two valuation models - price and returns models. The results of both models show that earnings and book value were, jointly and individually, positively and significantly related to stock price and stock returns. Interestingly, the value relevance of earnings and book value of KSE-listed firms were found to be higher than the findings observed in some developed and emerging countries. This finding could be attributed partially to the fairly limited sources of credible and useful competing information available to market participants and the lack of alternative sources of information about prospects. An important implication of this finding is that the KSE needs to develop its information environment further to become more efficient in offering a free exchange of information about companies listed on its exchange.