Value Relevance of Accounting Data in an Emerging Market: Did Accounting Reforms Make a Difference?

Abstract

This study investigates the association of accounting earnings (NI) and book value of equity (BV) with stock prices in Istanbul Stock Exchange (ISE), currently Borsa Istanbul (BIST), during the 1992–2006 period. We also explore the effect of accounting reforms on value relevance that is measured as the strength of the association between a firm’sNI and BV and its market value. We specifically investigate the impact of the Turkish Uniform Chart of Accounts (1994), mandatory inflation accounting, consolidations and voluntary (2003–2004), and the mandatory (2005) adoption of International Financial Reporting Standards (IFRS). We hypothesize that these reforms have reduced information asymme- try and thus are expected to enhance the value relevance of accounting information. We find strong evidence that the Ohlson model is a valid model, and BV is more value relevant than NI in BIST. We also find that inflation accounting and consolidations have enhanced the value relevance of BV, while IFRS has increased the value relevance of NI, but reduced that of BV. We contribute to the debate by exploiting the unique sequence of reforms, to come up with comparative value relevance testing designs and interesting results for all major reforms, which we believe will be instructive for researchers and for all emerging and developed economies undergoing similar reforms and best practices.